What Option Prices Tell Us About the ECB's Unconventional Monetary Policies
43 Pages Posted: 11 Dec 2018 Last revised: 17 Dec 2018
Date Written: December 2018
We use a series of different approaches to extract information about crash risk from option prices for the Euro-Dollar exchange rate, with each step sharpening the focus on extracting more specific measures of crash risk around dates of ECB measures of Unconventional Monetary Policy. Several messages emerge from the analysis. Announcing policies in general terms without precisely describing what exactly they entail does not move asset markets or actually increases crash risk. Also, policies directly focused on changing relative asset supplies do seem to have an impact, while measures aiming at easing financing costs of commercial banks do not.
Keywords: Exchange Rate Crash Risk, mixed diffusion jump risk models, Quantitative easing, risk reversals, unconventional monetary policies
JEL Classification: E44, E52, E58, E65, G12, G13, G14
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