Market-Based Monetary Policy Uncertainty

52 Pages Posted: 30 Apr 2019 Last revised: 7 May 2020

See all articles by Michael Bauer

Michael Bauer

Universität Hamburg

Aeimit Lakdawala

Wake Forest University - Department of Economics

Philippe Mueller

Warwick Business School Finance Group

Multiple version iconThere are 2 versions of this paper

Date Written: December 6, 2019


An extensive literature studies the impact of monetary policy surprises---shifts in expected policy rates---on asset prices. This paper addresses the open question of how shifts in the uncertainty about future policy rates matter for the transmission of monetary policy to financial markets. To this end, we develop a novel measure of policy uncertainty based on derivative prices that can be used in event studies. We provide evidence for an FOMC uncertainty cycle, the systematic pattern of resolution of uncertainty on FOMC announcement days followed by a gradual ramp-up over the next two weeks. Furthermore, specific monetary policy actions have differential effects on uncertainty, with the most substantial shifts due to changes in the forward guidance provided by the FOMC. Changes in uncertainty have pronounced effects on asset prices, distinct from the effects of changes in expected policy rates. Moreover, the prevailing level of uncertainty determines the effectiveness of policy surprises: When uncertainty is low, monetary policy surprises have stronger effects on asset prices.

Keywords: Monetary Policy Uncertainty, Federal Reserve, Svent study, Monetary Transmission, Implied Volatility

JEL Classification: E43, E44, E47

Suggested Citation

Bauer, Michael and Lakdawala, Aeimit and Mueller, Philippe, Market-Based Monetary Policy Uncertainty (December 6, 2019). WBS Finance Group Research Paper, Available at SSRN: or

Michael Bauer (Contact Author)

Universität Hamburg ( email )

Von-Melle-Park 5
Hamburg, 20146


Aeimit Lakdawala

Wake Forest University - Department of Economics ( email )

Winston Salem, NC
United States


Philippe Mueller

Warwick Business School Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

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