The Response of Tail Risk Perceptions to Unconventional Monetary Policy

We examine the impact of unconventional monetary policy (UMP) on tail risks in the stock market and risks of extreme interest rate movements. We find that UMP announcements substantially reduced option-implied equity market tail risks and interest rate risks. Most of the impact derives from forward guidance rather than asset purchase announcements. While the response of interest rate risks is in line with common explanations based on signalling and portfolio rebalancing channels, the reaction of tail risks in the equity market points to the risk-taking channel of monetary policy, as the commitment to low funding rates may have relaxed financial intermediaries' risk-bearing constraints.

Keywords: Unconventional Monetary Policy, Risk-Taking Channel, Forward Guidance, Tail Risk, Event Study

JEL Classification: E52, G12, G14

Suggested Citation: Suggested Citation

Hattori, Masazumi and Schrimpf, Andreas and Sushko, Vladyslav, The Response of Tail Risk Perceptions to Unconventional Monetary Policy (January 20, 2015). Available at SSRN: https://ssrn.com/abstract=2566769 or http://dx.doi.org/10.2139/ssrn.2566769