Unconventional Monetary Policy and Disaster Risk: Evidence from the Subprime and COVID-19 Crises

40 Pages Posted: 7 Jul 2020 Last revised: 17 Aug 2020

See all articles by Gustavo Cortes

Gustavo Cortes

Warrington College of Business, University of Florida

George Gao

T. Rowe Price; Cornell University - Samuel Curtis Johnson Graduate School of Management

Felipe Bastos G. Silva

University of Missouri, Columbia

Zhaogang Song

Johns Hopkins University - Carey Business School

Date Written: August 14, 2020

Abstract

Following the outbreak of the COVID-19 pandemic, the Federal Reserve (Fed) and Central Banks around the world multilaterally conducted a mix of unconventional monetary policies. We evaluate the effects of these recent interventions vis-a-vis earlier episodes of Quantitative Easing (QE) unilaterally conducted by the Fed in response to the subprime crisis. Using model-free measures of disaster risk in asset markets derived from daily options data, we document direct and spillover effects. Critically, the announcement of the Fed’s QE in response to the subprime crisis is followed by a reduction in disaster risk for the US and, on average, an increase in emerging markets disaster risk. Conversely, interventions during the COVID-19 crises are generally associated with sizeable reductions in disaster risk in the US and other international equity markets. Our results support the notion that collective actions by central banks have substantial effects in reducing investors' perceptions of disaster risk and reinforce concerns of unintended consequences of unilateral monetary interventions raised by emerging markets' policymakers during the subprime crisis.

Keywords: monetary policy, quantitative easing, disaster risk, COVID-19

JEL Classification: G15, E52, E58

Suggested Citation

Cortes, Gustavo and Gao, George and Silva, Felipe Bastos G. and Song, Zhaogang, Unconventional Monetary Policy and Disaster Risk: Evidence from the Subprime and COVID-19 Crises (August 14, 2020). Available at SSRN: https://ssrn.com/abstract=3642970 or http://dx.doi.org/10.2139/ssrn.3642970

Gustavo Cortes

Warrington College of Business, University of Florida ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

HOME PAGE: http://warrington.ufl.edu/directory/person/9136/

George Gao

T. Rowe Price ( email )

Baltimore, MD 21297-1215
United States

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Sage Hall 314
Ithaca, NY 14853
United States

Felipe Bastos G. Silva (Contact Author)

University of Missouri, Columbia ( email )

331 Cornell Hall
Columbia, MO 65211
United States
5738829905 (Phone)

Zhaogang Song

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

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