Risk, Uncertainty and Monetary Policy in a Global World

63 Pages Posted: 15 May 2020 Last revised: 18 May 2020

See all articles by Geert Bekaert

Geert Bekaert

Columbia Business School - Finance and Economics

Marie Hoerova

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Nancy R. Xu

Boston College, Carroll School of Management

Date Written: May 12, 2020

Abstract

Since the global financial crisis, there has been renewed interest in understanding how monetary policy shocks transmit across countries through risk variables, spurring a literature on the "global financial cycle." This paper studies how (conventional and unconventional) monetary policy shocks affect risk and uncertainty in three large economies: the US, euro area, and Japan. We construct measures of financial risk factors for each country by decomposing option-implied variances of the stock market into a conditional variance component ("uncertainty") and a variance risk premium component (which is more closely associated with risk aversion). The conditional variance component is computed using a novel non-linear forecasting model. We then analyze monetary policy effects on risk and uncertainty. We do not find evidence that US monetary policy affects risk or uncertainty in the other countries. Instead, we provide evidence of significant spillovers through interest rates. We find limited evidence of cross-country monetary policy spillovers to the major asset classes (stocks, bonds, exchange rates, commodities), but rather strong evidence of non-monetary policy-driven risk aversion and uncertainty shocks transmitting across all countries (not just emanating from the US).

Keywords: Risk, Uncertainty, Monetary policy, International spillovers, Global Financial Cycle, Stock returns, Bond returns, Exchange rates, Commodity prices

JEL Classification: E44, E52, G12, G20, E32

Suggested Citation

Bekaert, Geert and Hoerova, Marie and Xu, Nancy R., Risk, Uncertainty and Monetary Policy in a Global World (May 12, 2020). Available at SSRN: https://ssrn.com/abstract=3599583 or http://dx.doi.org/10.2139/ssrn.3599583

Geert Bekaert

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Marie Hoerova

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Nancy R. Xu (Contact Author)

Boston College, Carroll School of Management ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

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

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