1. The Response of Stock Market Volatility to Futures-Based Measures of Monetary Policy Shocks.
- Author
-
Gospodinov, Nikolay and Jamali, Ibrahim
- Subjects
- *
MARKET volatility , *FINANCIAL market reaction , *FINANCIAL leverage , *STOCK exchanges , *MONETARY policy , *RISK premiums , *GARCH model - Abstract
In this paper, we investigate the dynamic response of stock market volatility to changes in monetary policy. Using a vector autoregressive model, our findings reveal a significant and asymmetric response of stock returns and volatility to monetary policy shocks. Although the increase in the volatility risk premium, futures-trading volume, and leverage appear to contribute to a short-term increase in volatility, the longer-term dynamics of volatility are dominated by monetary policy's effect on fundamentals. The estimation results from a bivariate VAR-GARCH model suggest that the Fed does not respond to the stock market at a high frequency, but they also suggest that market participants' uncertainty regarding the monetary stance affects stock market volatility. [ABSTRACT FROM AUTHOR]
- Published
- 2014