What Option Prices Tell Us About the ECB’s Unconventional Monetary Policies

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.

Quantifying Systemic Risk in the Presence of Unlisted Banks: Application to the European Banking Sector

“…Our paper is part of a wider literature using high-frequency asset prices to inform central bank policies. Examples are Hattori et al (2016); Olijslagers et al (2019) who use option-implied asset volatility and risk-neutral distributions to evaluate the effectiveness of central bank stabilization policies.…”

Monte Carlo analysis of methods for extracting risk‐neutral densities with affine jump diffusions

“…Higher moments of RNDs contain predictive content about stock returns and returns of option portfolios (Bali & Murray, ). Policymakers use RND estimates to access the credibility of monetary policy (Bahra, ; Olijslagers, Petersen, de Vette, & van Wijnbergen, ), gauge market sentiment and access market beliefs about economic and political events (e.g., Birru & Figlewski, ). Option traders over‐the‐counter rely on RND estimates to price exotic options.…”