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U.S. unconventional monetary policy and risk tolerance in major currency markets

Author

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  • Athanasios P. Fassas
  • Dimitris Kenourgios
  • Stephanos Papadamou

Abstract

This paper studies the effects of U.S. unconventional monetary policy announcements on the implied volatility of three major currency pairs, Dollar/Euro, Dollar/British Pound and Dollar/Yen by using panel data analysis along with several model specifications and robustness tests. Monetary policy announcements not only have an effect on the realized behavior of asset prices, but also influence market participants’ expectations regarding future volatility. Our empirical findings show that Federal Reserve’s unconventional monetary policy announcements significantly reduce the market expectations about future realized volatility of exchange rates, suggesting that lax monetary policy leads to elevated risk-tolerance in currency markets. Furthermore, our findings indicate that market participants’ expectations respond differently to the different rounds of U.S. quantitative easing.

Suggested Citation

  • Athanasios P. Fassas & Dimitris Kenourgios & Stephanos Papadamou, 2021. "U.S. unconventional monetary policy and risk tolerance in major currency markets," The European Journal of Finance, Taylor & Francis Journals, vol. 27(10), pages 994-1008, July.
    • Handle: RePEc:taf:eurjfi:v:27:y:2021:i:10:p:994-1008
    DOI: 10.1080/1351847X.2020.1775105
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    Cited by:

    1. Inoue, Tomoo & Okimoto, Tatsuyoshi, 2022. "International spillover effects of unconventional monetary policies of major central banks," International Review of Financial Analysis, Elsevier, vol. 79(C).
    2. Dossani, Asad, 2024. "Monetary policy and currency variance risk premia," Research in International Business and Finance, Elsevier, vol. 69(C).
    3. Demetrio Lacava & Giampiero M. Gallo & Edoardo Otranto, 2022. "Unconventional policies effects on stock market volatility: The MAP approach," Journal of the Royal Statistical Society Series C, Royal Statistical Society, vol. 71(5), pages 1245-1265, November.
    4. Chris Magnis & Stephanos Papadamou & George Emmanuel Iatridis, 2024. "The impact of corporate governance mechanisms on mitigating banks’ propensity for risk-taking," Journal of Banking Regulation, Palgrave Macmillan, vol. 25(3), pages 234-255, September.
    5. Wan Wei & Susan Pozo & Evan Lau, 2021. "The effects of conventional and unconventional monetary policy on exchange rate volatility," Cogent Economics & Finance, Taylor & Francis Journals, vol. 9(1), pages 1997425-199, January.

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