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.
Acknowledgements and DisclosuresWe thank Gianni Amisano, Bartosz Mackowiak, Frank Smets, José Valentim and seminar participants at the European Central Bank, the FRB Philadelphia, the 2010 Midwest Macroeconomics Meetings (East Lansing) and the Fifth Annual Seminar on Banking, Financial Stability and Risk (Sao Paulo) for helpful comments and suggestions. Falk Bräuning and Francesca Fabbri provided excellent research assistance. The views expressed do not necessarily reflect those of the European Central Bank, the Eurosystem, or the National Bureau of Economic Research.
Bekaert, Geert & Hoerova, Marie & Lo Duca, Marco, 2013. "Risk, uncertainty and monetary policy," Journal of Monetary Economics, Elsevier, vol. 60(7), pages 771-788. citation courtesy of
Geert Bekaert & Marie Hoerova, 2010. "Risk, uncertainty and monetary policy," Research Bulletin, European Central Bank, vol. 10, pages 11-13. citation courtesy of