The Greenspan Put

37 Pages Posted: 28 Jun 2017 Last revised: 10 Jan 2019

See all articles by Sandeep Dahiya

Sandeep Dahiya

Georgetown University - Department of Finance

Bardia Kamrad

Georgetown University - Robert Emmett McDonough School of Business

Valerio Potì

University College Dublin

Akhtar R. Siddique

Government of the United States of America - Risk Analysis Division

Date Written: January 9, 2019

Abstract

How credible is the widely held belief that the Federal Reserve supports the markets? While this ``Greenspan Put" has received much public attention there is little empirical evidence that documents its existence and significance. In this paper, we exploit the time-series variation in the Fed Funds Rate (FFR) to detect and quantify the size of the "Greenspan Put". We find that during the periods when the FFR is below the benchmark implied by the Taylor Rule, traded equity put options are valued significantly lower compared to periods when the FFR is at or above its benchmark. These deviations from the Taylor Rule also create a moral hazard as out of the money call options exhibit higher prices during the period when the FFR is below its Taylor Rule benchmark. Finally, we document that the magnitude of the ``Greenspan Put" has declined after the Financial Crisis.

Keywords: Fed Funds Rate, Implied Volatility, Volatility Skew Surface, Greenspan Put.

JEL Classification: E44, E528, G13, G28

Suggested Citation

Dahiya, Sandeep and Kamrad, Bardia and Potì, Valerio and Siddique, Akhtar R., The Greenspan Put (January 9, 2019). Available at SSRN: https://ssrn.com/abstract=2993326 or http://dx.doi.org/10.2139/ssrn.2993326

Sandeep Dahiya

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States
202-687-3832 (Phone)

Bardia Kamrad

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States

Valerio Potì

University College Dublin ( email )

M. Smurfit School of Business
Carysfort Avenue, Blackrock
Dublin, Co Dublin
Ireland

Akhtar R. Siddique (Contact Author)

Government of the United States of America - Risk Analysis Division ( email )

400 7th Ave
Washington, DC 20219
United States
202-649-5526 (Phone)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
162
Abstract Views
1,193
rank
192,174
PlumX Metrics