Effects of explicit FOMC policy rate guidance on equities and risk measures
AbstractWe quantify the impact of explicit FOMC policy rate guidance used as an unconventional monetary policy tool at the zero lower bound of the policy rate on US equity prices, as well as on the risk indicators of credit and CDS spreads, implied volatilities and US equity index risk reversals. We find that explicit FOMC policy rate guidance announcements at the zero lower bound led to a significant increase in US equity prices, for an aggregate equity index as well as for US commercial bank and US non-financial equities. Moreover, we find that they led to a significant reduction in some credit spreads. They also led to a significant reduction in an implied volatility index for US government bonds, as well as in the absolute value of US equity risk reversals, implying a lower perceived risk attached to a large fall in the equity index.
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Bibliographic InfoPaper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 390.
Date of creation: Sep 2013
Date of revision:
Monetary policy; central bank communication; policy rate guidance;
Find related papers by JEL classification:
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
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- Richhild Moessner, 2014. "International spillovers from US forward guidance to equity markets," DNB Working Papers 427, Netherlands Central Bank, Research Department.
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