The Impact of Heterogeneous Unconventional Monetary Policies on Market Uncertainty

74 Pages Posted: 29 May 2020

See all articles by Irma Alonso Alvarez

Irma Alonso Alvarez

Bank of Spain

Pedro Serrano

University Carlos III of Madrid - Department of Business Administration

Antoni Vaello-Sebastià

University of the Balearic Islands

Date Written: April 15, 2020

Abstract

This article analyzes the impact of the unconventional monetary policies (UMPs) of four major central banks (the Fed, ECB, BoE and BOJ) on market uncertainty. We exploit the heterogeneity of different UMP actions to disentangle their influence on reducing the ex ante perception of extreme events (tail risks) using the information contained in risk-neutral densities from the most liquid stock index options. The empirical findings show that the announcement of UMPs reduces the risk-neutral probability of extreme events across various horizons and thresholds, supporting the hypothesis of the risk-taking channel. The most effective measures are the forward guidance and liquidity actions, rather than asset purchases. Interestingly, foreign UMP actions also prove to be significant variables affecting domestic tail risks, mainly at longer horizons. These results reveal an original cross-border effect of foreign UMPs on domestic tail risks. Finally, the dynamics of the UMPs are captured by a structural model that confirms a transitory impact of UMPs on market tail risk perceptions.

Keywords: unconventional monetary policy, risk-neutral density, tail risk, event study, SVAR

JEL Classification: E44, E58, G01, G10, G14

Suggested Citation

Alonso Alvarez, Irma and Serrano, Pedro and Vaello-Sebastià, Antoni, The Impact of Heterogeneous Unconventional Monetary Policies on Market Uncertainty (April 15, 2020). Available at SSRN: https://ssrn.com/abstract=3576394 or http://dx.doi.org/10.2139/ssrn.3576394

Irma Alonso Alvarez (Contact Author)

Bank of Spain ( email )

Calle Alcala, 48
Madrid, 28014
Spain

Pedro Serrano

University Carlos III of Madrid - Department of Business Administration ( email )

C/ Madrid, 126
Getafe, Madrid 28903
Spain
+34916248926 (Phone)

Antoni Vaello-Sebastià

University of the Balearic Islands ( email )

Crtra. Valldemossa, km 7.5
Ed. Ramon Llull
Palma de Mallorca, Illles Balears 07122
Spain
971172024 (Phone)

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