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The Transmission of Monetary Policy to the Cost of Hedging

Author

Listed:
  • Matthias R. Fengler

    (University of St. Gallen - SEPS: Economics and Political Sciences; Swiss Finance Institute)

  • Winfried Koeniger

    (University of St. Gallen; CESifo (Center for Economic Studies and Ifo Institute); Center for Financial Studies (CFS); IZA Institute of Labor Economics; Swiss Finance Institute)

  • Stephan Minger

    (University of St. Gallen)

Abstract

We analyze the transmission of monetary policy to the costs of hedging using options order book data. Monetary policy transmits to hedging costs both by changing the relevant state variables, such as the value of the underlying, its volatility and tail risk, and by affecting option market liquidity, including the bid-ask spread and market depth. Our estimates suggest that during the peak of the pandemic crisis in March 2020, monetary policy decisions resulted in substantial changes in hedging costs even within short intraday time windows around the decisions, amounting approximately to the annual expenses of a typical equity mutual fund.

Suggested Citation

  • Matthias R. Fengler & Winfried Koeniger & Stephan Minger, 2025. "The Transmission of Monetary Policy to the Cost of Hedging," Swiss Finance Institute Research Paper Series 25-03, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2503
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    More about this item

    Keywords

    Liquidity; Monetary policy; Option order books; Option markets; COVID-19 pandemic;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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