Fed-Driven Systemic Tail Risk: High-Frequency Measurement, Evidence and Implications

Deniz Erdemlioglu, Christopher Neely and Xiye Yang

No 2023-016, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We develop a framework to measure market-wide (systemic) tail risk in the cross-section of asset returns. Using high-frequency data on individual U.S. stocks and sector-specific ETF portfolios, we estimate time-varying jump intensities and multi-asset tail risk around Fed policy announcements. While most FOMC announcements generate systemic left-tail risk, there is no evidence that macro announcements have a similar effect. The magnitude of the tail risk induced by Fed policy announcements varies over the business cycle, peaks during the global financial crisis and remains high during phases of unconventional monetary policy. We use our approach to construct a Fed-driven systemic tail risk (STR) indicator. STR helps explain the pre-FOMC announcement drift and significantly increases variance risk premia, particularly for the meetings without press conferences. Our measure complements existing option-based tail risk measures in identifying tail events.

Keywords: time-varying tail risk; high-frequency data; Federal Open Market Committee (FOMC) news; monetary policy announcements; cojumps; systemic risk; jump intensity (search for similar items in EconPapers)
JEL-codes: C12 C14 C22 C32 C58 G12 G14 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2023-07-20, Revised 2025-05-27
New Economics Papers: this item is included in nep-ban, nep-cba, nep-ecm, nep-fmk, nep-mst and nep-rmg
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DOI: 10.20955/wp.2023.016

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