Risk, Uncertainty and Monetary Policy

40 Pages Posted: 12 Aug 2013

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: July 2013

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. The effect of monetary policy on risk aversion is also apparent in regressions using high frequency data.

Keywords: Monetary policy, option implied volatility, risk aversion, uncertainty, business cycle

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

Suggested Citation

Bekaert, Geert and Hoerova, Marie and Lo Duca, Marco, Risk, Uncertainty and Monetary Policy (July 2013). ECB Working Paper No. 1565. Available at SSRN: https://ssrn.com/abstract=2284240

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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