Fed’s Unconventional Monetary Policy and Risk Spillover in the US Financial Markets

26 Pages Posted: 27 Feb 2019

See all articles by Mehmet Balcilar

Mehmet Balcilar

Eastern Mediterranean University

Zeynel Abidin Ozdemir

IZA Institute of Labor Economics; Economic Research Forum (ERF)

Huseyin Ozdemir

affiliation not provided to SSRN

Mark E. Wohar

University of Nebraska at Omaha

Date Written: February 6, 2019

Abstract

This study examines volatility spillover dynamics among the S&P 500 index, the US 10-year Treasury yield, the US dollar index futures and the commodity price index. The focus of the study is to analyze effects of Fed’s unconventional monetary policy on the US financial markets. We use realized volatility measures based on daily data covering the period from December 29, 1996 to November 12, 2018. To address nonlinear and asymmetric spillover dynamics in low and high volatility states, we propose a new regime-dependent spillover index based on a smooth transition vector autoregressive (STVAR) model, extending the study of Diebold and Yilmaz (2009,2012) to regime switching models. When applied to US financial data, we find strong evidence that the US financial market risk structure changes after the announcement of quantitively easing (QE) through the portfolio balance channel. The risk spillover moves from purchased assets to non-purchased assets after the QE announcements.

Keywords: Unconventional Monetary Policy, US Financial Markets, Volatility Spillover, STVAR Model

JEL Classification: C01, C51, C58, E58, G01, G11, G12, G14, Q43

Suggested Citation

Balcilar, Mehmet and Ozdemir, Zeynel Abidin and Ozdemir, Huseyin and Wohar, Mark E., Fed’s Unconventional Monetary Policy and Risk Spillover in the US Financial Markets (February 6, 2019). Available at SSRN: https://ssrn.com/abstract=3331725 or http://dx.doi.org/10.2139/ssrn.3331725

Mehmet Balcilar (Contact Author)

Eastern Mediterranean University ( email )

Gazimagusa
Turkey

HOME PAGE: http://www.mbalcilar.net

Zeynel Abidin Ozdemir

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Economic Research Forum (ERF) ( email )

21 Al-Sad Al-Aaly St.
(P.O. Box: 12311)
Dokki, Cairo
Egypt

Huseyin Ozdemir

affiliation not provided to SSRN

Mark E. Wohar

University of Nebraska at Omaha ( email )

Department of Economics
6708 Pine Street MH 332S
Omaha, NE 68182
United States
402-554-3712 (Phone)
402-554-2853 (Fax)

HOME PAGE: http://cba.unomaha.edu/faculty/mwohar/WEB/homepage.html

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