The Greenspan Put

Abstract

How credible is the widely held belief that Federal Reserve supports the markets. While this Greenspan Put has received much public attention there is little empirical evidence that documents its existence and significance. In this paper, we exploit the time-series variation in the Fed Funds Rate (FFR) to detect and quantify the size of the Greenspan Put. We find that during the periods when the fed funds rate is below the benchmark implied by the Taylor Rule, traded equity put options are valued significantly lower compared to periods when fed funds rate is at or above its benchmark. These deviations from the Taylor Rule also create moral hazard as out of the money call options exhibit higher prices during the period when fed funds rate is below its Taylor Rule benchmark. Finally, we document that the magnitude of the Greenspan Put has declined after the Financial Crisis.