The Response of Tail Risk Perceptions to Unconventional Monetary Policy

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...

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Bibliographic Details
Published in:American economic journal. Macroeconomics 2016-04, Vol.8 (2), p.111-136
Main Authors: Hattori, Masazumi, Schrimpf, Andreas, Sushko, Vladyslav
Format: Article
Language:English
Subjects:
Asset acquisitions
Central banks
Communication
Derivatives
Equity
Federal funding
Federal funds rate
Federal Reserve monetary policy
Interest rates
Investments
Investors
Macroeconomics
Monetary policy
Prices
Probability
Risk assessment
Risk aversion
Securities markets
Studies
Volatility
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Summary: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.
ISSN:1945-7707
1945-7715
DOI:10.1257/mac.20140016