Central bank announcements and monitoring portfolio risks

Huynh Tuan Duy Bui, Helmut Herwartz and Shu Wang

International Review of Economics & Finance, 2025, vol. 103, issue C

Abstract: This paper examines how FOMC announcements affect portfolio risks by assessing the real-time performance of conditional risk measures—specifically, value-at-risk (VaR) and expected shortfall (ES). Using threshold GARCH models with skewed-t innovations, we study six portfolios spanning equities, bonds, and gold over the period 2006–2019. While model-based risk forecasts generally align with nominal coverage levels, we document significant underperformance surrounding FOMC announcements, particularly when monetary policy (MP) surprises raise medium- and long-term bond yields. In contrast, short-term rate shocks and market-based risk shifts have more modest effects. Violations of VaR thresholds occur disproportionately on the day following announcements, revealing a delayed portfolio response to policy signals. To support risk monitoring, we propose a composite MP news indicator that aggregates the surprise components into a single scalar metric. This indicator effectively anticipates elevated shortfall risk during contractionary announcements and provides early-warning signals relevant for real-time portfolio rebalancing and regulatory stress testing.

Keywords: Monetary policy surprises; Portfolio risk; Conditional Value-at-risk; Conditional expected shortfall; Stock market; Threshold GARCH; Skewed student-t distribution (search for similar items in EconPapers)
JEL-codes: C22 G11 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:103:y:2025:i:c:s1059056025005908

DOI: 10.1016/j.iref.2025.104427

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