The Greenspan Put
37 Pages Posted: 28 Jun 2017 Last revised: 10 Jan 2019
Date Written: January 9, 2019
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: Suggested Citation