Identifying the relationship between US monetary policy and the VIX futures: An empirical characterization using VAR methodology

New Keynesian theory believes the central bank control over the real interest rate both in the short run and the long run due to the price stickiness. The expectation on the rental rate of capital is reflected by the real interest rate. Therefore, the return on the assets, determined by the expected future dividends, can be heavily influenced by the real interest rate. Vector autoregressive model (VAR) has been widely used to address issues regarding both identification and the impact of monetary policy. This paper aims to investigate the interdependence between asset prices and monetary policy in the VAR model, combining both traditional short-run and long-run restrictions. Instead of using stock prices as indicators of monetary policy stance, this paper introduced VIX futures price which may provide additional forecasting information in either the determinants of target variables or the target variables. The principal component analysis is implemented to reduce the dimensions of VIX futures data. According to the outcome, a contractionary monetary policy shock raises the real interest rate and lowers the output. In addition, it also reduces asset prices. In response to the changes in the real interest rate, there is likely a positive financial market shock.