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The response of tail risk perceptions to unconventional monetary policy

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  • Masazumi Hattori
  • Andreas Schrimpf
  • Vladyslav Sushko

Abstract

We evaluate the response of perceived tail risks in financial markets to the implementation of unconventional monetary policy by the U.S. Federal Reserve. Using information from out-of-money equity index options, we find that perceived risks decline significantly in response to both policy announcements and actual asset purchases. The announcement effects are strongest specifically for downside risk measures rather than simple measures of volatility (e.g. the VIX). The impact of actual purchases is strongest when driven by simultaneous expansion and the duration extension of the Federal Reserve's balance sheet. These effects of both announcements and purchases have been variable over time and particularly pronounced during the latest policy phases implemented in 2012, a period also coinciding with the Federal Reserve's more extensive use of forward guidance about short-term rates.

Suggested Citation

  • Masazumi Hattori & Andreas Schrimpf & Vladyslav Sushko, 2013. "The response of tail risk perceptions to unconventional monetary policy," BIS Working Papers 425, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:425
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    More about this item

    Keywords

    Unconventional monetary policy; Tail risk; Event study; Bayesian time-varying parameter VARs;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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