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Effects of explicit FOMC policy-rate guidance on equities and risk measures

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  • Richhild Moessner

Abstract

We quantify the impact of explicit Federal Open Market Committee (FOMC) policy-rate guidance used as an unconventional monetary-policy tool at the zero lower bound of the policy rate on US equity prices, as well as on the risk indicators of credit and CDS spreads, implied volatilities and US equity index risk reversals. We find that explicit FOMC policy-rate guidance announcements at the zero lower bound led to a significant increase in US equity prices, for an aggregate equity index as well as for US commercial bank and US nonfinancial equities. Moreover, we find that they led to a significant reduction in some credit spreads. They also led to a significant reduction in an implied volatility index for US government bonds, as well as in the absolute value of US equity risk reversals, implying a lower perceived risk attached to a large fall in the equity index.

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  • Richhild Moessner, 2014. "Effects of explicit FOMC policy-rate guidance on equities and risk measures," Applied Economics, Taylor & Francis Journals, vol. 46(18), pages 2139-2153, June.
    • Handle: RePEc:taf:applec:v:46:y:2014:i:18:p:2139-2153
    DOI: 10.1080/00036846.2014.894668
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    1. Moessner, Richhild, 2015. "Reactions of US government bond yields to explicit FOMC forward guidance," The North American Journal of Economics and Finance, Elsevier, vol. 33(C), pages 217-233.
    2. Richhild Moessner, 2015. "International spillovers from US forward guidance to equity markets," Applied Economics, Taylor & Francis Journals, vol. 47(42), pages 4549-4560, September.
    3. Richhild Moessner & David-Jan Jansen & Jakob de Haan, 2017. "Communication About Future Policy Rates In Theory And Practice: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 31(3), pages 678-711, July.
    4. Zhou, Tao & Li, Zhongfei & Bai, Hengrui & Du, Zhidi & Huang, Jinbo & Ding, Zengcai, 2024. "Does unconventional monetary policy improve credit support for the industry chain? The mechanism of trade credit," International Review of Economics & Finance, Elsevier, vol. 91(C), pages 180-192.
    5. Richhild Moessner, 2015. "International spillovers from US forward guidance to equity markets," Applied Economics, Taylor & Francis Journals, vol. 47(42), pages 4549-4560, September.
    6. van Holle, Frederiek, 2017. "Essays in empirical finance and monetary policy," Other publications TiSEM 30d11a4b-7bc9-4c81-ad24-5, Tilburg University, School of Economics and Management.
    7. Gunda‐Alexandra Detmers & Ozer Karagedikli & Richhild Moessner, 2021. "Quantitative or Qualitative Forward Guidance: Does it Matter?," The Economic Record, The Economic Society of Australia, vol. 97(319), pages 491-503, December.
    8. Haryo Kuncoro & Gatot Nazir Ahmad & Dianta Sebayang, 2021. "A textual analysis of central bank communication the case of Indonesia," Economics Bulletin, AccessEcon, vol. 41(3), pages 2158-2172.

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