Risk, Uncertainty and Monetary Policy
National Bank of Belgium Working Paper No. 229
63 Pages Posted: 13 Oct 2012
Date Written: October 2012
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: Suggested Citation