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Discussion Paper Details

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Title: What Option Prices tell us about the ECB's Unconventional Monetary Policies

Author(s): Nander de Vette, Stan Olijslager, Annelie Petersen and Sweder van Wijnbergen

Publication Date: December 2018

Keyword(s): Exchange Rate Crash Risk, mixed diffusion jump risk models, Quantitative easing, risk reversals and unconventional monetary policies

Programme Area(s): Financial Economics, International Macroeconomics and Finance and Monetary Economics and Fluctuations

Abstract: We use a series of different approaches to extract information about crash risk from option prices for the Euro-Dollar exchange rate, with each step sharpening the focus on extracting more specific measures of crash risk around dates of ECB measures of Unconventional Monetary Policy. Several messages emerge from the analysis. Announcing policies in general terms without precisely describing what exactly they entail does not move asset markets or actually increases crash risk. Also, policies directly focused on changing relative asset supplies do seem to have an impact, while measures aiming at easing financing costs of commercial banks do not.

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Bibliographic Reference

de Vette, N, Olijslager, S, Petersen, A and van Wijnbergen, S. 2018. 'What Option Prices tell us about the ECB's Unconventional Monetary Policies'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13371