The Federal Reserve’s Quantitative Easing policy and volatility spillovers: Evidence from Australia

Abstract

The Federal Reserve’s Quantitative Easing (QE) policies have injected significant liquidity into financial markets. While a vast literature examines the implications of QE, its effect on the financial markets of small open economies is yet to be fully understood. This paper uses Australia as a case study to reveal evidence of intensified volatility spillovers resulting from QE. Using ex-ante implied volatility measures, we derive time-varying indices that exhibit the risk transference between financial markets in Australia and the U.S. Our results show intensified spillovers explainable by QE, especially for equity markets during periods of policy normalization. An amplification of spillovers is also found to follow contractionary QE shocks, implying that risk increases as asset purchases decline. In all, we provide evidence of an international volatility channel of unconventional monetary policy, demonstrating the ramifications of central bank-induced portfolio balancing among investors.