51 Pages Posted: 18 Oct 2010
Date Written: September 2010
The VIX, the stock market option-based implied volatility, strongly co-moves with measures of the monetary policy stance. When decomposing the VIX into two components, a proxy for risk aversion and expected stock market volatility ("uncertainty"), we find that a lax monetary policy decreases both risk aversion and uncertainty, with the former effect being stronger. The result holds in a structural vector autoregressive framework, controlling for business cycle movements and using a variety of identification schemes for the vector autoregression in general and monetary policy shocks in particular.
Suggested Citation: Suggested Citation
Bekaert, Geert and Hoerova, Marie and Lo Duca, Marco, Risk, Uncertainty and Monetary Policy (September 2010). NBER Working Paper No. w16397. Available at SSRN: https://ssrn.com/abstract=1692513