Economics at your fingertips  

Market volatility, monetary policy and the term premium

Sushanta Mallick (), Madhusudan Mohanty () and Fabrizio Zampolli

No 606, BIS Working Papers from Bank for International Settlements

Abstract: Based on empirical VAR models, we investigate the role of (option-implied) stock and bond market volatilities and monetary policy in the determination of the US 10-year term premium. Our preliminary findings are that an unexpected loosening of monetary policy - through a cut in the federal funds rate in the pre-crisis sample or an increase in bond purchases post-Lehman - typically leads to a decline in both expected stock and bond market volatilities and the term premium. However, while conventional monetary policy boosts economic activity in the precrisis period, bond purchases are found to have no statistically significant real effects postcrisis. Second, expected equity market volatility (VIX) is found to be more important than bond market volatility (MOVE). Pre-crisis, a shock to the VIX leads to a concomitant rise in the MOVE, a contraction of economic activity, a fall in broker-dealer leverage and a rise in the term premium, consistent with pro-cyclical swings in market liquidity. Post-crisis, an innovation to the VIX is instead associated with a drop in the term premium, suggesting the prevalence of flight to quality effects.

Keywords: bond market volatility; VIX; unconventional monetary policy; quantitative easing; long-term interest rate; term premia (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mon
Date: 2017-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8) Track citations by RSS feed

Downloads: (external link) Full PDF document (application/pdf) (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this paper

More papers in BIS Working Papers from Bank for International Settlements Contact information at EDIRC.
Bibliographic data for series maintained by Christian Beslmeisl ().

Page updated 2019-02-12
Handle: RePEc:bis:biswps:606