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The effect of monetary policy on investors’ risk perception: Evidence from the UK and Germany

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Author Info

  • Dan Luo

    (University of Nottingham)

  • Iris Biefang-Frisancho Mariscal

    (University of the West of England)

  • Peter Howells

    (University of the West of England)

Abstract

We use vector autoregressive models to estimate the effect of monetary policy on investors’ risk aversion. The latter is proxied by a variety of option based implied volatility indices for Germany and the UK. There is clear evidence of a procyclical response between monetary policy and risk aversion. Monetary policy shocks affect UK investors risk attitude for longer periods, while they have a stronger impact on German investors for a shorter period of time. There is also evidence that the Bank of England reacts to increases in risk aversion with expansionary monetary policy. In contrast, the ECB appears to tighten monetary policy, although this result may be explained by the ECB making policy decisions for a group of countries. These results are robust w.r.t. to the various risk aversion and monetary policy stance proxies.

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File URL: http://carecon.org.uk/DPs/1107.pdf
File Function: First version, 2011
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Bibliographic Info

Paper provided by Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol in its series Working Papers with number 1107.

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Length: 38 pages
Date of creation: May 2011
Date of revision:
Handle: RePEc:uwe:wpaper:1107

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Keywords: Monetary policy; Risk aversion; impulse responses;

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  1. Dubecq, S. & Mojon, B. & Ragot, X., 2009. "Fuzzy Capital Requirements, Risk-Shifting and the Risk Taking Channel of Monetary Policy," Working papers 254, Banque de France.
  2. Altunbas, Yener & Gambacorta, Leonardo & Marqués-Ibáñez, David, 2010. "Does monetary policy affect bank risk-taking?," Working Paper Series 1166, European Central Bank.
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