Stable monetary policy and risk premia

We want to test the following hypothesis: when monetary policy is expected to be stable and not change, risk premia on the various asset classes become low: the risk is linked to the expected variability of monetary policy. We therefore look at the link between expected changes in the short-term interest rate (which we measure by the spread and the absolute value of the spread between 2-year and 3-month interest rates) on the one hand and the term premium on long-term interest rates, the VIX, the VSTOXX and credit spreads on the other. We find a clear link between expectations of little change in the short-term interest rate on the one hand and in equity variability and the credit spread on the other.