DP13371 What Option Prices tell us about the ECB's Unconventional Monetary Policies

Author(s): Nander de Vette, Annelie Petersen, Stan Stan Olijslager, Sweder van Wijnbergen
Publication Date: December 2018
Date Revised: December 2018
Keyword(s): Exchange Rate Crash Risk, mixed diffusion jump risk models, Quantitative easing, risk reversals, unconventional monetary policies
JEL(s): E44, E52, E58, E65, G12, G13, G14
Programme Areas: Financial Economics, International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13371

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.