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The impact of heterogeneous unconventional monetary policies on the expectations of market crashes

Author

Listed:
  • Irma Alonso

    (Banco de España)

  • Pedro Serrano

    (Universidad Carlos III de Madrid)

  • Antoni Vaello-Sebastià

    (Universitat des Illes Balears)

Abstract

This article analyzes the impact of the unconventional monetary policies (UMPs) of four major central banks (the Fed, ECB, BoE and BOJ) on the probability of future market crashes. We exploit the heterogeneity of different UMP actions to disentangle their influence on reducing the ex ante perception of extreme events (tail risks) using the information contained in risk-neutral densities from the most liquid stock index options. The empirical findings show that the announcement of UMPs reduces the risk-neutral probability of extreme events across various horizons and thresholds, supporting the hypothesis of the risk-taking channel. Interestingly, foreign UMP actions also prove to be significant variables affecting domestic tail risks, mainly at longer horizons. These results reveal a cross-border effect of foreign UMPs on domestic tail risks. Finally, the dynamics of the UMPs are captured by a structural model that confirms a transitory impact of UMPs on market tail risk perceptions.

Suggested Citation

  • Irma Alonso & Pedro Serrano & Antoni Vaello-Sebastià, 2021. "The impact of heterogeneous unconventional monetary policies on the expectations of market crashes," Working Papers 2127, Banco de España.
    • Handle: RePEc:bde:wpaper:2127
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    More about this item

    Keywords

    unconventional monetary policy; risk-neutral density; tail risk; event study; SVAR;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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