The Response of Tail Risk Perceptions to Unconventional Monetary Policy
56 Pages Posted: 27 Feb 2014
There are 2 versions of this paper
The Response of Tail Risk Perceptions to Unconventional Monetary Policy
Date Written: September 2013
Abstract
We evaluate the response of perceived tail risks in financial markets to the implementation of unconventional monetary policy by the U.S. Federal Reserve. Using information from out-of-money equity index options, we find that perceived risks decline significantly in response to both policy announcements and actual asset purchases. The announcement effects are strongest specifically for downside risk measures rather than simple measures of volatility (e.g. the VIX). The impact of actual purchases is strongest when driven by simultaneous expansion and the duration extension of the Federal Reserve's balance sheet. These effects of both announcements and purchases have been variable over time and particularly pronounced during the latest policy phases implemented in 2012, a period also coinciding with the Federal Reserve's more extensive use of forward guidance about short-term rates.
Keywords: Unconventional monetary policy, Tail risk, Event study, Bayesian time-varying parameter VARs
JEL Classification: E44, E52, G12, G20, E32
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
A Preferred-Habitat Model of the Term Structure of Interest Rates
By Dimitri Vayanos and Jean-luc Vila
-
A Preferred-Habitat Model of the Term Structure of Interest Rates
By Dimitri Vayanos and Jean-luc Vila
-
A Preferred-Habitat Model of the Term Structure of Interest Rates
By Dimitri Vayanos and Jean-luc Vila
-
What Does Monetary Policy Do to Long-Term Interest Rates at the Zero Lower Bound?
-
Large-Scale Asset Purchases by the Federal Reserve: Did They Work?
By Joseph Gagnon, Matthew Raskin, ...