Working Paper: NBER ID: w16397
Authors: Geert Bekaert; Marie Hoerova; Marco Lo Duca
Abstract: The VIX, the stock market option-based implied volatility, strongly co-moves with measures of the monetary policy stance. When decomposing the VIX into two components, a proxy for risk aversion and expected stock market volatility ("uncertainty"), we find that a lax monetary policy decreases both risk aversion and uncertainty, with the former effect being stronger. The result holds in a structural vector autoregressive framework, controlling for business cycle movements and using a variety of identification schemes for the vector autoregression in general and monetary policy shocks in particular.
Keywords: Risk Aversion; Monetary Policy; Uncertainty; VIX
JEL Codes: E32; E44; E52; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lax monetary policy (E63) | decrease in risk aversion (D81) |
| monetary policy shocks (E39) | variance in risk aversion (D11) |
| uncertainty (D89) | response to monetary policy changes (E52) |
| high uncertainty and risk aversion (D81) | looser monetary policy stances (E63) |
| risk aversion (D81) | comovement with past monetary policy stance (E63) |