Risk-taking and monetary policy before the crisis: The case of Germany

Iris Biefang-Frisancho

Working Papers from Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol

Abstract: We use impulse response functions to test for the effect of monetary policy on investors’ risk aversion in Germany. The latter is proxied by a variety of option based implied volatility indices. We estimate twenty-four models and find in all models that risk aversion responds to monetary policy. Furthermore, the business cycle varies mostly through changes in risk aversion and there is feedback from the business cycle to risk aversion, in that a fall in the price of risk has a positive effect on the business cycle. These responses indicate that accommodating monetary policy before the crisis may have increased risk appetite, which in turn has strengthened the business cycle with the latter feeding back into a further reduction in the price of risk.

Date: 2013-01-08
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Persistent link: https://EconPapers.repec.org/RePEc:uwe:wpaper:20131308

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