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

44 Pages Posted: 7 Jul 2020 Last revised: 2 Nov 2021

See all articles by Gustavo Cortes

Gustavo Cortes

Warrington College of Business, University of Florida

George Gao

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 20, 2021

Abstract

We contrast the interventions conducted by the Federal Reserve in response to the subprime and COVID-19 crises with respect to their effectiveness in reducing disaster risk. Using model-free measures of disaster risk derived from daily options data, we document that interventions in response to both crises reduced tail risks in domestic equity markets. Spillover effects are notably distinct. While the subprime interventions are generally characterized by negative spillovers to international equity markets, the responses to the COVID--19 crisis are generally associated with positive spillovers. We interpret these results as consistent with different degrees of protagonism played by Central Banks in the two episodes, emphasizing the importance of a broader participation of monetary authorities in expanding their balance sheets to counteract the effects of major crises.

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 20, 2021). Journal of International Money and Finance, Forthcoming, 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

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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