Unconventional monetary policy and disaster risk: Evidence from the subprime and COVID–19 crises

We compare the interventions conducted by the Federal Reserve in response to the subprime and COVID-19 crises with respect to their effectiveness in reducing disaster risk. Using model-free measures of disaster risk derived from daily options data, we document that interventions in response to both crises reduced tail risks in domestic equity markets. The spillover effects of the two crises have been markedly dissimilar. While subprime interventions are generally characterized by negative spillovers to international equity markets, policy responses to the COVID-19 crisis are generally associated with positive spillovers. We interpret these results as consistent with the different degrees of protagonism by central banks in the two episodes, emphasizing the importance of a broader participation of monetary authorities in expanding their balance sheets to counteract the effects of major crises.