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The Response of Tail Risk Perceptions to Unconventional Monetary Policy †

The Response of Tail Risk Perceptions to Unconventional Monetary Policy † Abstract We examine the impact of unconventional monetary policy (UMP) on stock market tail risk 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. Communication about the future path of policy rates reduced volatility expectations of long-term rates and the associated risk premia. The reaction of equity market tail risk, in turn, points to the risk-taking channel of monetary policy, as the commitment to low funding rates may have relaxed financial intermediaries’ risk-bearing constraints. (JEL E52, E58, G12, G13, G14 ) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Macroeconomics American Economic Association

The Response of Tail Risk Perceptions to Unconventional Monetary Policy †

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Publisher
American Economic Association
Copyright
Copyright © 2016 by the American Economic Association
Subject
Articles
ISSN
1945-7715
eISSN
1945-7715
DOI
10.1257/mac.20140016
Publisher site
See Article on Publisher Site

Abstract

Abstract We examine the impact of unconventional monetary policy (UMP) on stock market tail risk 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. Communication about the future path of policy rates reduced volatility expectations of long-term rates and the associated risk premia. The reaction of equity market tail risk, in turn, points to the risk-taking channel of monetary policy, as the commitment to low funding rates may have relaxed financial intermediaries’ risk-bearing constraints. (JEL E52, E58, G12, G13, G14 )

Journal

American Economic Journal: Macroeconomics – American Economic Association

Published: Apr 1, 2016

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