Does the Fed Put Really Exist?

Follow us on LinkedIn

The Fed, or Greenspan, put is a monetary policy tool used by the Federal Reserve to help stabilize the economy. The name comes from former Federal Reserve Chairman Alan Greenspan, who is credited with using the tool to help stave off a recession in the early 2000s.

The Fed put works by the Federal Reserve buying up Treasury bonds and other assets in order to inject money into the economy. This extra cash flow can help to boost economic activity and prevent a downturn.

Reference [1] formally examined the existence and impact of the Fed put.  It used option prices to test if monetary policy has a significant impact on stock market participants’ expectations. Using three different methodologies, namely the Taylor Rule, Natural Language Processing (NLP) applied to FOMC minutes, and Hidden Markov Models (HMM), the authors confirmed the existence of the Fed put,

We find evidence that markets adjust the prices of traded options to take into account the Fed Put. We also find that the impact of the Fed Put on traded options was significantly larger in period before the 2008 financial crisis. Our results suggest that the Fed policy had an impact on option prices that cannot be explained purely due to its impact on the real economy.

The paper also pointed out that the impact of the Fed put has declined after the Financial Crisis,

In contrast, we find that the Fed Put has declined after the Financial Crisis. This is also the period with Quantitative Easing. Our results suggest, but do not prove, that the Financial Crisis has substantially reduced market’s expectations of protection against downside risk. We are not able to deduce whether this decline is because of historically low discount rates or because the market’s expectations have been permanently altered, such as the so-called Yellen call.

References

[1]  Dahiya, Sandeep and Kamrad, Bardia and Potì, Valerio and Siddique, Akhtar R., Fed Put in the Equity Options Markets, 2022, https://ssrn.com/abstract=4184702

Further questions

What's your question? Ask it in the discussion forum

Have an answer to the questions below? Post it here or in the forum

LATEST NEWSBiogen’s QALSODY® (tofersen), the First Therapy to Treat Rare, Genetic Form of ALS, Received Positive Opinion from CHMP
Biogen’s QALSODY® (tofersen), the First Therapy to Treat Rare, Genetic Form of ALS, Received Positive Opinion from CHMP

SOD1-ALS is a devastating, uniformly fatal, and ultra-rare genetic form of ALS affecting less than 1,000 people in Europe1 With QALSODY, Biogen has advanced the role of neurofilament in the development of new medicines for ALS, with the potential to accelerate further discovery in the…

Stay up-to-date with the latest news - click here
LATEST NEWSTanzanian Parliamentary Committee Lauds Barrick’s Work at North Mara
Tanzanian Parliamentary Committee Lauds Barrick’s Work at North Mara

DAR ES SALAAM, Tanzania, Feb. 23, 2024 (GLOBE NEWSWIRE) — Tanzania’s Parliamentary Standing Committee for Energy and Minerals has commended Barrick Gold Corporation (NYSE:GOLD) (TSX:ABX) for the significant turnaround at the North Mara gold mine and its improved relations with the community. Members of Parliament…

Stay up-to-date with the latest news - click here
LATEST NEWSOnex Reports Fourth Quarter and Full Year 2023 Results
Onex Reports Fourth Quarter and Full Year 2023 Results

All amounts in U.S. dollars unless otherwise stated TORONTO, Feb. 23, 2024 (GLOBE NEWSWIRE) — Onex Corporation (TSX: ONEX) today announced its financial results for the fourth quarter and year ended December 31, 2023. “Onex delivered solid overall performance in 2023, driven by good investment…

Stay up-to-date with the latest news - click here
LATEST NEWSPlug and Uline Expand Partnership to Supply Hydrogen and Fuel Cells at Four Additional Sites
Plug and Uline Expand Partnership to Supply Hydrogen and Fuel Cells at Four Additional Sites

8-year partnership and $20,000,000 expansion underscores Uline’s commitment to Plug’s hydrogen and fuel cell solutions, significantly enhancing efficiency of operations LATHAM, N.Y., Feb. 23, 2024 (GLOBE NEWSWIRE) — Plug Power Inc. (NASDAQ: PLUG), a global leader in comprehensive hydrogen solutions for the green hydrogen economy,…

Stay up-to-date with the latest news - click here
LATEST NEWSCorporate emissions: don’t just take their word for it
Corporate emissions: don’t just take their word for it

Also in today’s newsletter, brighter weather ahead for offshore wind and a closer look at ESG bond funds

Stay up-to-date with the latest news - click here

Leave a Reply