Risk, Uncertainty and Monetary Policy

National Bank of Belgium Working Paper No. 229

63 Pages Posted: 13 Oct 2012

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: October 2012

Abstract

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.

Keywords: Monetary policy, Option implied volatility, Risk aversion, Uncertainty, Business cycle, Stock market volatility dynamics

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

Suggested Citation

Bekaert, Geert and Hoerova, Marie and Lo Duca, Marco, Risk, Uncertainty and Monetary Policy (October 2012). National Bank of Belgium Working Paper No. 229. Available at SSRN: https://ssrn.com/abstract=2160837 or http://dx.doi.org/10.2139/ssrn.2160837

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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