Effects of explicit FOMC policy rate guidance on equities and risk measures

We quantify the impact of explicit FOMC policy rate guidance used as an unconventional monetary policy tool at the zero lower bound of the policy rate on US equity prices, as well as on the risk indicators of credit and CDS spreads, implied volatilities and US equity index risk reversals. We find that explicit FOMC policy rate guidance announcements at the zero lower bound led to a significant increase in US equity prices, for an aggregate equity index as well as for US commercial bank and US non-financial equities. Moreover, we find that they led to a significant reduction in some credit spreads. They also led to a significant reduction in an implied volatility index for US government bonds, as well as in the absolute value of US equity risk reversals, implying a lower perceived risk attached to a large fall in the equity index.
 
Key words: Monetary policy, central bank communication, policy rate guidance.
JEL classification: E58.

Working paper no. 390