{"id":68186,"date":"2024-05-18T09:51:35","date_gmt":"2024-05-18T14:51:35","guid":{"rendered":"https:\/\/olduvai.ca\/?p=68186"},"modified":"2024-05-18T09:51:35","modified_gmt":"2024-05-18T14:51:35","slug":"feds-asset-purchases-result-in-increased-market-volatility","status":"publish","type":"post","link":"https:\/\/olduvai.ca\/?p=68186","title":{"rendered":"Fed\u2019s Asset Purchases Result in Increased Market Volatility"},"content":{"rendered":"
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Fed\u2019s Asset Purchases Result in Increased Market Volatility<\/a><\/h3>\n

“Once again, the empirical evidence supports reigning in the Fed; the economy works better when the Fed does less, not more.”<\/strong><\/p>\n<\/div>\n

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The Federal Reserve underwent a\u00a0massive regime shift following the 2008 financial crisis. It incorporated several new tools into its monetary policy arsenal, ranging from\u00a0interest on excess reserves<\/a>\u00a0to\u00a0large\u2010\u200bscale asset purchases<\/a>\u00a0(\u201cquantitative easing\u201d) to deal with the crisis. Unfortunately, as with most public institutions, power given is seldom relinquished.<\/p>\n

As a\u00a0recent Cato CMFA article<\/a>\u00a0noted, if the Fed is expected to massively increase its balance sheet in response to every major crisis, it will never return to a\u00a0pre\u2010\u200b2008 operating system. Furthermore, the COVID-19 pandemic spurred a\u00a0further round of massive quantitative easing, so much so that instead of shrinking back down, the\u00a0Fed\u2019s asset holdings are now over one\u2010\u200bthird the size of the entire US commercial banking<\/a>\u00a0sector.<\/p>\n

It stands to reason that such a\u00a0massive shift in central banking\u00a0should<\/em>\u00a0have effects on the financial system. A\u00a0recent\u00a0<\/a>Wall Street Journal\u00a0<\/a><\/em>opinion piece<\/a>\u00a0makes this argument and uses options market data to suggest that the Fed\u2019s involvement in financial markets has increased stock market volatility.<\/p>\n

To be fair, the article points out a\u00a0singular observation, one which may not reflect any underlying trend.<\/p>\n

But there are ways to check for any underlying trend, such as\u00a0vector autoregressions (VARs)<\/a>. In this post, I\u00a0use a\u00a0VAR method<\/a>\u00a0and demonstrate that the Fed\u2019s 2008 regime shift has indeed had serious repercussions for market volatility as measured with the\u00a0CBOE Volatility Index (\u201cVIX\u201d)<\/a>. (For those interested, I\u00a0provide more details on the methodology after discussing the results.)<\/p>\n

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…click on the above link to read the rest of the article…<\/p>\n<\/div>\n<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

Fed\u2019s Asset Purchases Result in Increased Market Volatility “Once again, the empirical evidence supports reigning in the Fed; the economy works better when the Fed does less, not more.” The Federal Reserve underwent a\u00a0massive regime shift following the 2008 financial crisis. It incorporated several new tools into its monetary policy arsenal, ranging from\u00a0interest on excess […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[2],"tags":[7557,7735,303,34591,4427,33985,3650],"class_list":["post-68186","post","type-post","status-publish","format-standard","hentry","category-economics","tag-asset-purchases","tag-cato-institute","tag-fed","tag-jai-kedia","tag-market-volatility","tag-quoth-the-raven-fringe-finance","tag-us-federal-reserve"],"_links":{"self":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/68186","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=68186"}],"version-history":[{"count":1,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/68186\/revisions"}],"predecessor-version":[{"id":68187,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/68186\/revisions\/68187"}],"wp:attachment":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=68186"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=68186"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=68186"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}