Risk, Uncertainty and Monetary Policy

Geert Bekaert, Marco Lo Duca and Marie Hoerova

No 8154, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We document a strong co-movement between the VIX, the stock market option-based implied volatility, and monetary policy. We decompose the VIX into two components, a proxy for risk aversion and expected stock market volatility ("uncertainty"), and analyze their dynamic interactions with monetary policy in a structural vector autoregressive framework. A lax monetary policy decreases risk aversion after about five months. Monetary authorities react to periods of high uncertainty by easing monetary policy. These results are robust to controlling for business cycle movements. We further investigate channels through which monetary policy may affect risk aversion, e.g., through its effects on broad liquidity measures and credit.

Keywords: Business cycle; Monetary policy; Option implied volatility; Risk aversion; Stock market volatility dynamics; Uncertainty (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 G12 G20 (search for similar items in EconPapers)
Date: 2010-12
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (81)

Downloads: (external link)
https://cepr.org/publications/DP8154 (application/pdf)

Related works:
Journal Article: Risk, uncertainty and monetary policy (2013)
Working Paper: Risk, uncertainty and monetary policy (2013)
Working Paper: Risk, uncertainty and monetary policy (2012)
Journal Article: Risk, uncertainty and monetary policy (2010)
Working Paper: Risk, Uncertainty and Monetary Policy (2010)
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: https://EconPapers.repec.org/RePEc:cpr:ceprdp:8154

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP8154

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().