Fed put in the equity options markets

We examine whether monetary policy affects investor beliefs using equity option prices. Put options are significantly cheaper during accommodative policy periods, consistent with a “Fed put” effect. Critically, this relationship is strongest when investor risk aversion is high. The Fed put effect is economically large in the pre-2008 period but vanishes post-crisis, suggesting the financial crisis permanently altered expectations of Fed intervention. Our instrumental variable approach addresses endogeneity and reverse causality.