Central Bank Crisis Interventions and the Term Structure of Market Fear

Mattia Bevilacqua, Jon Danielsson, Lerby Ergun, Andreas Uthemann and Jean-Pierre Zigrand

Staff Working Papers from Bank of Canada

Abstract: We study the impact of Fed crisis interventions on market fears — the perceived risk of large asset price drops. To do so, we develop a methodological framework that allows us to evaluate the causal effect of unexpected Fed actions on changes in market fears. We extract daily fear term structures from options markets with event horizons ranging from two weeks to ten years. We then use high-frequency price movements around crisis announcements for a wide range of financial assets, including FX, equity, and fixed income markets, to isolate the shock component of Fed interventions. We can measure the heterogeneous effects of various crisis tools by classifying Fed announcement shocks into five different policy groups. Applying this to the market turmoil of 2020, we find that the Fed impacts market fear via risk and information effects. The risk channel dominates at short to medium terms and works via asset purchases, whereas the information channel dominates at longer terms and operates via interest rate policies.

Keywords: Financial markets and funds management; Market functioning; Financial system; Financial stability and systemic risk; Models and tools; Econometric; statistical and computational methods (search for similar items in EconPapers)
JEL-codes: E52 E58 G12 G13 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2026-05
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:26-17

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