The response of tail risk perceptions to unconventional monetary policy

Masazumi Hattori, Andreas Schrimpf and Vladyslav Sushko

No 425, BIS Working Papers from Bank for International Settlements

Abstract: We evaluate the response of perceived tail risks in financial markets to the implementation of unconventional monetary policy by the U.S. Federal Reserve. Using information from out-of-money equity index options, we find that perceived risks decline significantly in response to both policy announcements and actual asset purchases. The announcement effects are strongest specifically for downside risk measures rather than simple measures of volatility (e.g. the VIX). The impact of actual purchases is strongest when driven by simultaneous expansion and the duration extension of the Federal Reserve's balance sheet. These effects of both announcements and purchases have been variable over time and particularly pronounced during the latest policy phases implemented in 2012, a period also coinciding with the Federal Reserve's more extensive use of forward guidance about short-term rates.

Keywords: Unconventional monetary policy; Tail risk; Event study; Bayesian time-varying parameter VARs (search for similar items in EconPapers)
Pages: 56 pages
Date: 2013-09
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Citations: View citations in EconPapers (10)

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Related works:
Journal Article: The Response of Tail Risk Perceptions to Unconventional Monetary Policy (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:425

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