feedback in the financial market and this can lead to unstable dynamics and excess volatility. The paper suggests that policy …

An unanticipated tightening of monetary policy increases option implied volatility in equity and bond markets. At the … same time, realized volatility declines over the period corresponding to the increase in option implied volatility. The … result is a decrease in the volatility swap return, defined as a forward contract on the realized volatility of an underlying …