When the central bank adjusts its benchmark interest rate, multiple channels transmit this change to risk asset prices. Which mechanism is most critical in explaining the decline in asset valuations following an interest rate hike?

The direct reduction in consumer wealth due to increased borrowing costs, leading to an immediate fall in demand for all asset classes.

The increased discount rate applied to future cash flows, reducing the present value of expected earnings, combined with a contraction in credit availability.

A reallocation of investor portfolios from equities to fixed$-$income securities$,$ which improves market liquidity and drives asset prices downward.

The shift in central bank communication strategies that erode investor confidence, independent of any fundamental valuation changes.