Risk, Uncertainty and Monetary Policy

44 Pages Posted: 27 Dec 2010

See all articles by Geert Bekaert

Geert Bekaert

Columbia Business School - Finance and Economics

Marie Hoerova

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Marco Lo Duca

European Central Bank (ECB)

Multiple version iconThere are 6 versions of this paper

Date Written: December 2010

Abstract

We document a strong co-movement between the VIX, the stock market option-based implied volatility, and monetary policy. We decompose the VIX into two components, a proxy for risk aversion and expected stock market volatility ("uncertainty"), and analyze their dynamic interactions with monetary policy in a structural vector autoregressive framework. A lax monetary policy decreases risk aversion after about five months. Monetary authorities react to periods of high uncertainty by easing monetary policy. These results are robust to controlling for business cycle movements. We further investigate channels through which monetary policy may affect risk aversion, e.g., through its effects on broad liquidity measures and credit.

Keywords: business cycle, monetary policy, option implied volatility, risk aversion, stock market volatility dynamics, uncertainty

JEL Classification: E32, E44, E52, G12, G20

Suggested Citation

Bekaert, Geert and Hoerova, Marie and Lo Duca, Marco, Risk, Uncertainty and Monetary Policy (December 2010). CEPR Discussion Paper No. DP8154. Available at SSRN: https://ssrn.com/abstract=1729572

Geert Bekaert (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Marie Hoerova

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Marco Lo Duca

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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