The effect of monetary policy on investors’ risk perception: Evidence from the UK and Germany

Dan Luo, Iris Biefang-Frisancho Mariscal and Peter Howells
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Dan Luo: University of Nottingham
Iris Biefang-Frisancho Mariscal: University of the West of England
Peter Howells: University of the West of England

No 1107, Working Papers from Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol

Abstract: We use vector autoregressive models to estimate the effect of monetary policy on investors’ risk aversion. The latter is proxied by a variety of option based implied volatility indices for Germany and the UK. There is clear evidence of a procyclical response between monetary policy and risk aversion. Monetary policy shocks affect UK investors risk attitude for longer periods, while they have a stronger impact on German investors for a shorter period of time. There is also evidence that the Bank of England reacts to increases in risk aversion with expansionary monetary policy. In contrast, the ECB appears to tighten monetary policy, although this result may be explained by the ECB making policy decisions for a group of countries. These results are robust w.r.t. to the various risk aversion and monetary policy stance proxies.

Keywords: Monetary policy; Risk aversion; impulse responses (search for similar items in EconPapers)
JEL-codes: E43 E44 G12 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2011-05
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac, nep-mon and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:uwe:wpaper:1107

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