The Effectiveness of Unconventional Monetary Policy on Risk Aversion and Uncertainty

This paper examines the impact of unconventional monetary policy of ECB measured by its balance sheet expansion on euro area equity market uncertainty and investors risk aversion within a structural VAR framework. An expansionary balance sheet shock decreases both risk aversion and uncertainty at least in the medium-run. A negative shock on policy rates has also a negative impact on risk aversion and uncertainty. These results are generally robust to different specifications of the VAR model, estimation procedures and identification schemes. Conversely, periods of high uncertainty and risk aversion are followed by a looser conventional monetary policy. The effect of uncertainty and risk aversion on ECB's total assets is not always statistically significant