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Effects of explicit FOMC policy rate guidance on equities and risk measures

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  • Richhild Moessner

Abstract

We 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.

Suggested Citation

  • Richhild Moessner, 2013. "Effects of explicit FOMC policy rate guidance on equities and risk measures," DNB Working Papers 390, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:390
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    References listed on IDEAS

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    8. Richhild Moessner, 2013. "Effects of explicit FOMC policy rate guidance on market interest rates," DNB Working Papers 384, Netherlands Central Bank, Research Department.
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    Cited by:

    1. repec:bla:ecinqu:v:55:y:2017:i:4:p:1593-1624 is not listed on IDEAS
    2. repec:bla:jecsur:v:31:y:2017:i:3:p:678-711 is not listed on IDEAS
    3. Richhild Moessner & David-Jan Jansen & Jakob de Haan, 2017. "Communication About Future Policy Rates In Theory And Practice: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 31(3), pages 678-711, July.
    4. van Holle, Frederiek, 2017. "Essays in empirical finance and monetary policy," Other publications TiSEM 30d11a4b-7bc9-4c81-ad24-5, Tilburg University, School of Economics and Management.
    5. Alan Blinder & Michael Ehrmann & Jakob de Haan & David-Jan Jansen, 2017. "Necessity as the mother of invention: monetary policy after the crisis," Economic Policy, CEPR;CES;MSH, vol. 32(92), pages 707-755.
    6. Michelle Bongard & Gabriele Galati & Richhild Moessner & William Nelson, 2016. "Connecting the dots: market reactions to forecasts of policy rates and forward guidance provided by the Fed," DNB Working Papers 523, Netherlands Central Bank, Research Department.
    7. Kedan, Danielle & Stuart, Rebecca, 2014. "Central Bank Communications: A Comparative Study," Quarterly Bulletin Articles, Central Bank of Ireland, pages 89-104, April.
    8. Benjamin D. Keen & Alexander W. Richter & Nathaniel A. Throckmorton, 2017. "Forward Guidance And The State Of The Economy," Economic Inquiry, Western Economic Association International, vol. 55(4), pages 1593-1624, October.
    9. Richhild Moessner, 2015. "International spillovers from US forward guidance to equity markets," Applied Economics, Taylor & Francis Journals, vol. 47(42), pages 4549-4560, September.
    10. Kool, Clemens J. M. & Thornton, Daniel L., 2015. "How Effective Is Central Bank Forward Guidance?," Review, Federal Reserve Bank of St. Louis, vol. 97(4), pages 303-322.
    11. Amaya, Diego & Filbien, Jean-Yves, 2015. "The similarity of ECB’s communication," Finance Research Letters, Elsevier, vol. 13(C), pages 234-242.
    12. Detmers, Gunda-Alexandra & Nautz, Dieter, 2014. "Stale forward guidance," Economics Letters, Elsevier, vol. 124(3), pages 358-361.
    13. Moessner, Richhild, 2015. "Reactions of US government bond yields to explicit FOMC forward guidance," The North American Journal of Economics and Finance, Elsevier, vol. 33(C), pages 217-233.
    14. Tsz-Kin Chung & Cho-Hoi Hui & Ka-Fai Li, 2014. "Assessing the Effectiveness of Date-Based Forward Guidance at the Zero Lower Bound with a Non-Gaussian Affine Term-Structure Model," Working Papers 192014, Hong Kong Institute for Monetary Research.

    More about this item

    Keywords

    Monetary policy; central bank communication; policy rate guidance;

    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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