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The impact of heterogeneous unconventional monetary policies on the expectations of market crashes

Irma Alonso Alvarez (), Pedro Serrano () and Antoni Vaello-Sebastià ()
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Pedro Serrano: Universidad Carlos III de Madrid
Antoni Vaello-Sebastià: Universitat des Illes Balears

No 2127, Working Papers from Banco de España

Abstract: This article analyzes the impact of the unconventional monetary policies (UMPs) of four major central banks (the Fed, ECB, BoE and BOJ) on the probability of future market crashes. We exploit the heterogeneity of different UMP actions to disentangle their influence on reducing the ex ante perception of extreme events (tail risks) using the information contained in risk-neutral densities from the most liquid stock index options. The empirical findings show that the announcement of UMPs reduces the risk-neutral probability of extreme events across various horizons and thresholds, supporting the hypothesis of the risk-taking channel. Interestingly, foreign UMP actions also prove to be significant variables affecting domestic tail risks, mainly at longer horizons. These results reveal a cross-border effect of foreign UMPs on domestic tail risks. Finally, the dynamics of the UMPs are captured by a structural model that confirms a transitory impact of UMPs on market tail risk perceptions.

Keywords: unconventional monetary policy; risk-neutral density; tail risk; event study; SVAR (search for similar items in EconPapers)
JEL-codes: E44 E58 G01 G10 G14 (search for similar items in EconPapers)
Pages: 77 pages
Date: 2021-08
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-isf, nep-mac, nep-mon and nep-rmg
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