We examine the impact of unconventional monetary policy (UMP) on stock market tail risk and risks of extreme interest rate movements. We find that UMP announcements substantially reduced option-implied
equity market tail risks and interest rate risks. Most of the impact derives from forward guidance rather than asset purchase announcements. Communication about the future path of policy rates reduced volatility expectations of long-term rates and the associated risk premia. The reaction of equity market tail risk, in turn, points to the risk-taking channel of monetary policy, as the commitment to low funding rates may have relaxed financial intermediaries' riskbearing constraints. (JEL E52, E58, G12, G13, G14)
Hattori, Masazumi, Andreas Schrimpf, and Vladyslav Sushko.
"The Response of Tail Risk Perceptions to Unconventional Monetary Policy."
American Economic Journal: Macroeconomics,
Central Banks and Their Policies
Asset Pricing; Trading Volume; Bond Interest Rates
Contingent Pricing; Futures Pricing; option pricing
Information and Market Efficiency; Event Studies; Insider Trading