How Risk-Mitigating Are the ECB's Unconventional Monetary Policy Announcements? Evidence from Risk-Neutral Densities

Abstract

In the aftermath of the financial crisis in 2008 and over the course of the European debt crisis, the ECB announced a number of unconventional monetary policy implementations with the aim of restoring confidence in the functioning of the European financial system. This paper studies the effect of financial turmoil and unconventional monetary policy announcements on the risk perception of market participants. Using a large data set covering the time period from pre-crisis 2006 until the end of 2013, I provide empirical evidence that the deteriorated market conditions cause the shape of the risk-neutral density to significantly differ from that in more stable market environments. Furthermore, the results suggest that direct purchase programs such as the Covered Bond Purchase Program (CBPP) and the Securities Market Program (SMP) have a risk-mitigating effect on the risk assessment of the market whereas instruments that indirectly intervene in the financial market through improved lending operations further increase the tail risk.