The response of stock market volatility to futures-based measures of monetary policy shocks

Nikolay Gospodinov and Ibrahim Jamali

International Review of Economics & Finance, 2015, vol. 37, issue C, 42-54

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 response of stock returns and volatility to monetary policy shocks. While 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 that market participants’ uncertainty regarding the monetary stance affects stock market volatility.

Keywords: Stock market volatility; Federal funds futures; Monetary policy; Volatility risk premium (search for similar items in EconPapers)
JEL-codes: C32 C58 E52 E58 G10 G12 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (22)

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Working Paper: The Response of Stock Market Volatility to Futures-Based Measures of Monetary Policy Shocks (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:37:y:2015:i:c:p:42-54

DOI: 10.1016/j.iref.2014.11.001

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