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

  • Dan Luo

    (University of Nottingham)

  • Iris Biefang-Frisancho Mariscal

    (University of the West of England)

  • Peter Howells

    (University of the West of England)

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
Download Restriction: no

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
Contact details of provider: Postal: 0117 328 3610
Phone: 0117 328 3610
Web page: http://www1.uwe.ac.uk/bl/research/bristoleconomics.aspx
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  1. Yener Altunbas & Leonardo Gambacorta & David Marques-Ibanez, 2010. "Does monetary policy affect bank risk-taking?," BIS Working Papers 298, Bank for International Settlements.
  2. 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.
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