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The Response of Tail Risk Perceptions to Unconventional Monetary Policy
Masazumi Hattori, Andreas Schrimpf, and Vladyslav Sushko
American Economic Journal: Macroeconomics. Apr 2016, Vol. 8, No. 2: Pages 111-136

The Response of Tail Risk Perceptions to Unconventional Monetary Policy†

Masazumi Hattori1, Andreas Schrimpf2 and Vladyslav Sushko3

1Institute of Economic Research, Hitotsubashi University, 2-1 Naka, Kunitachi, Tokyo 186-8601, Japan (e-mail: )

2Bank for International Settlements, Centralbahnplatz 2, 4002 Basel, Switzerland (e-mail: )

3Bank for International Settlements, Centralbahnplatz 2, 4002 Basel, Switzerland (e-mail: )

Abstract

We examine the impact of unconventional monetary policy (UMP) on stock market tail risk and risks of extreme interest rate movements. We find that UMP announcements substantially reduced option-implied equity market tail risks and interest rate risks. Most of the impact derives from forward guidance rather than asset purchase announcements. Communication about the future path of policy rates reduced volatility expectations of long-term rates and the associated risk premia. The reaction of equity market tail risk, in turn, points to the risk-taking channel of monetary policy, as the commitment to low funding rates may have relaxed financial intermediaries’ risk-bearing constraints. (JEL E52, E58, G12, G13, G14)