Fed’s Unconventional Monetary Policy and Risk Spillover in the US Financial Markets

Mehmet Balcilar, Zeynel Ozdemir (), Huseyin Ozdemir and Mark Wohar ()
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Huseyin Ozdemir: Gazi University, Ankara, Turkey

No 15-47, Working Papers from Eastern Mediterranean University, Department of Economics

Abstract: This study examines volatility spillover dynamics among the S&P 500 index, the US 10-year Treasury yield, the US dollar index futures and the commodity price index. The focus of the study is to analyze effects of Fed’s unconventional monetary policy on the US financial markets. We use realized volatility measures based on daily data covering the period from December 29, 1996 to November 12, 2018. To address nonlinear and asymmetric spillover dynamics in low and high volatility states, we propose a new regime-dependent spillover index based on a smooth transition vector autoregressive (STVAR) model, extending the study of Diebold and Yilmaz (2009,2012) to regime switching models. When applied to US financial data, we find strong evidence that the US financial market risk structure changes after the announcement of quantitively easing (QE) through the portfolio balance channel. The risk spillover moves from purchased assets to non-purchased assets after the QE announcements.

Keywords: Unconventional Monetary Policy; US Financial Markets; Volatility Spillover; STVAR Model (search for similar items in EconPapers)
JEL-codes: C01 C51 C58 E58 G01 G11 G12 G14 Q43 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2019
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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http://repec.economics.emu.edu.tr/RePEc/emu/wpaper/15-47.pdf First version, 2019 (application/pdf)

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Journal Article: Fed’s unconventional monetary policy and risk spillover in the US financial markets (2020)
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