What Is Greenspan Put?

Greenspan put was the moniker given to the policies implemented by Alan Greenspan during his tenure as Federal Reserve (Fed) Chair. The Greenspan-led Fed was extremely proactive in halting excessive stock market declines, acting as a form of insurance against losses, similar to a regular 澳洲幸运5官方开奖结果体彩网:put option.

Understanding Greenspan Put

Greenspan was chair of the 澳洲幸运5官方开奖结果体彩网:Federal Reserve (Fed) from 1987 to 2006. Throughout his tenure, he sought to support the U.S. economy by actively using the 澳洲幸运5官方开奖结果体彩网:federal funds rate and other policies in the Fed's arsenal to buoy the markets, especially stock markets.

Essentially, the Greenspan put is a type of a Fed put. The term "Fed put," a play on the option term "put," is the market belief that the Fed would step in and implement policies to limit the 澳洲幸运5官方开奖结果体彩网:stock market's decline beyond a certain threshold. During Greenspan's tenure, it was widely believed that a stock market decline of over 20%, which typically denotes a 澳洲幸运5官方开奖结果体彩网:bear market, would prompt the Fed to lower the fed funds rate. This was seen as insurance and allayed the fears of investor🅰s that a protracted, and costly, market decline would occur.

A consequence of Greenspan's policies was that investors were more prone to excessive risk-taking in stock markets, leading to market bubbles, which, at times, resulted in more market volatility. Experienced investors, needing to buy protection from the actions of 澳洲幸运5官方开奖结果体彩网:short-sellers, specul🍰ators, and so on, resorted to the time-tested trading strategy of buying put options to protect their portfolios from excessive market declines precipitated by the inevitable bursting of these market bubbles.

Put Protection

A put can be utilized in a trading strategy of hedging against price risk and has been used by traders to offset unwelcome market volatility that could adversely affect their 澳洲幸运5官方开奖结果体彩网:portfolios. 🌳This strategy could help investors mitigate losses and potentially profit, while still holding on to their stock positions.

For example, as internet stocks fell drastically in price from 2000 to 2002, some investors profited mightily by deploying this strategy. In practice, the idea might have advocated the notion that if you bought an internet stock, and then it dramatically rose in price over a few months, then, to preserve your gains, you would buy a put option with several months' duration to protect those shares.

However, the moniker Greenspan put differs from the traditional put option strategy in that there is not a specific investing or trading methodology. Rather, it is the generalized notion🍒 of a commitment, that has never been officially confirmed, that the Greenspan-led Fed would be extremely proactive in halting excessive stock market declines.

Some have suggested that an unintended consequence of Greenspan put was to make put option derivat♛ive strategies profitable, especially in times surrounding a crisis. The chart below seems to give some historical support for why investors held that notion.

This chart shows how, beginning in 1997, average 澳洲幸运5官方开奖结果体彩网:implied volatility began to rise and remained elevated through 2004. Since the phrase Greenspan put was more heavily referenced in the late 1990s, it seems rational that investors and traders would hold this perception from that time forward. However, the fundamental factors that correspond to Greenspan's philosophy for how the Fed should accomplish its 澳洲幸运5官方开奖结果体彩网:stated goals equally contribute to the use of this phrase.

Greenspan’s Actions

One of Greenspan's first meaningful acts as chair occurred following the 1987 stock market crash. He immediately lowered rates to help companies recover from the crisis and set a precedent that the Fed would intervene in times of crisis.

This assumption of intervention and support from the Fed induced risk-taking that made trading and investing, in general, more attractive. As 澳洲幸运5官方开奖结果体彩网:valuations ൲rose beyond recognizably acceptable ranges, professional investors were less able to rationalize whether it was a sound decision to participate in some stocks—especially internet-related stocks, which were booming.

In this environment, stock prices could make wild fluctuations, making put options an ever more popular insurance to investors. The inflated valuations and rising prices made it difficult for seasoned investors to buy stocks without considering 澳洲幸运5官方开奖结果体彩网:put-option protection.

In the early 1990s, Greenspan instituted a series of rate decreases lasting until approximately 1993. Through Greenspan’s tenure, there were also several instances where the Fed intervened to support exorbitant risk-taking in the stock market, including market-moving events such as the savings and loan crisis, Gulf War, Mexican crisis, Asian financial crisis, 澳洲幸运5官方开奖结果体彩网:Long-Term Capital Management (LTCM) crisis, Y2K, and, especially, the bursting of the 澳洲幸运5官方开奖结果体彩网:dotcom bubble following the market's peak in 2000.

Overall, the Greenspan put ushered in an era that encouraged risk-taking since it was expectedꦅ that the Fed would be tacitly providing insurance against excessive m🍃arket declines, much like a regular put option would do.

Greenspan most often used a reduction in 澳洲幸运5官方开奖结果体彩网:interest rates to stem market declines. The chart above shows the general downward trend of the federal funds target rate through Greenspan's 🌞time as chair. The effects of the Fed’s rate reductions helped and encouraged investors to borrow funds more cheaply to invest in the securities market, which added to an enviꦐronment of risk-taking.

'Fed Puts' Post Greenspan

On February 1, 2006, 澳洲幸运5官方开奖结果体彩网:Ben Bernanke replaced Greenspan as the 澳洲幸运5官方开奖结果体彩网:Federal Reserve Board (FRB) Chair. Bernanke followed a similar strategy to Greenspan in 2007 and 2008. The combination of rate reduction timing implemented by Greenspan and Bernanke has been generally attributed to supporting excessive risk-taking in the financial markets, which many believe to have been a catalyst contributing to the conditions of the 2008 financial crisis.

However, as the chart below shows, in the decade that followed the financial crisis, the results of such policies are not so obviously seen as encouraging inordinate risk. The same policies implemented by Greenspan and Bernanke continued, in measured degree, with subsequent chairs 澳洲幸运5官方开奖结果体彩网:Janet Yellen and Jerome Powell. As the chart shows, the historical results after 2008 demonstrated, on average, much less vo🌺latility in both stock and option prices than 🦄the decade that preceded it.