Monetary Policy and the VIX
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The relationship between the Federal Reserve monetary policy and the CBOE volatility index, VIX, is examined. Volatility plays a crucial role in pricing derivatives; therefore, an understanding of how macroeconomic factors affect asset prices and volatility is important to market participants. Daily trading data is examined from January 2nd, 1990 to February 29th, 2008. A significant relationship is identified between measures of monetary policy and the VIX, which suggests that the volatility implicit in derivatives is influenced by monetary policy. In particular, volatility is shown to be significantly higher (lower) when the Federal Reserve is following an expansive (restrictive) monetary policy.