Working Paper: CEPR ID: DP13371
Authors: Stan Stan Olijslager; Annelie Petersen; Nander de Vette; Sweder van Wijnbergen
Abstract: We use a series of different approaches to extract information about crash risk from option prices for the Euro-Dollar exchange rate, with each step sharpening the focus on extracting more specific measures of crash risk around dates of ECB measures of Unconventional Monetary Policy. Several messages emerge from the analysis. Announcing policies in general terms without precisely describing what exactly they entail does not move asset markets or actually increases crash risk. Also, policies directly focused on changing relative asset supplies do seem to have an impact, while measures aiming at easing financing costs of commercial banks do not.
Keywords: quantitative easing; unconventional monetary policies; exchange rate crash risk; risk reversals; mixed diffusion; jump risk models
JEL Codes: E44; E52; E58; E65; G12; G13; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| vague announcements (E60) | increase crash risk (R48) |
| precise communication (L96) | decrease crash risk (R48) |
| policies altering asset supplies (E65) | decrease perceived crash risk (R48) |
| policies easing financing costs (G32) | no effect on perceived crash risk (R48) |
| detailed OMT announcements (E60) | significant reduction in perceived crash risk (R48) |
| Draghi's 'whatever it takes' speech (E52) | no significant market response (G19) |