Predicting firm-level volatility in the United States: the role of monetary policy uncertainty

Matthew Clance, Riza Demirer, Rangan Gupta and Clement Kyei

Economics and Business Letters, 2020, vol. 9, issue 3, 167-177

Abstract: Theoretically, there is exists a strong link between monetary policy rate uncertainty and equity return volatility, since asset pricing models assume the risk-free rate to be a key factor for equity prices. Most studies, however, focus on aggregate volatility proxies, ignoring the evidence that idiosyncratic risk could also be an important consideration, particularly for under-diversified investors and arbitrageurs. Given this, we examine firm-level annual data for the United States over 1997 to 2016, and show that monetary policy uncertainty does indeed contain significant predictive information over realized and implied volatilities at both the firm- and industry-level. The predictive power of monetary policy uncertainty is found to be robust across the low and high quantiles of volatility with higher policy uncertainty predicting higher firm-level volatility in subsequent periods. While the strongest possible volatility effect is observed in the case of Retail Trade, we observe opposite resuThis paper provides novel evidence for the This paper provides novel evidence for the predictive power of monetary policy uncertainty (MPU) over stock return volatility at the firm level based on a dataset constructed from 9,458 U.S. firms. Our findings show that monetary policy uncertainty contains significant predictive information over realized and implied volatilities at both the firm- and industry-level, with higher policy uncertainty predicting higher volatility in subsequent periods. While the strongest possible volatility effect is observed in the case of Retail Trade, we observe opposite results for Mining with high policy uncertainty predicting lower volatility in this sector. We argue that the dual nature of the underlying commodity for Mining companies, both as a consumption and investment asset, drives the negative effect of policy uncertainty on volatility in this sector. Nevertheless, the findings highlight the predictive information captured by monetary policy actions on the idiosyncratic component of equity market volatility.predictive power of monetary policy uncertainty (MPU) over stock return volatility at the firm level based on a dataset constructed from 9,458 U.S. firms. Our findings show that monetary policy uncertainty contains significant predictive information over realized and implied volatilities at both the firm- and industry-level, with higher policy uncertainty predicting higher volatility in subsequent periods. While the strongest possible volatility effect is observed in the case of Retail Trade, we observe opposite results for Mining with high policy uncertainty predicting lower volatility in this sector. We argue that the dual nature of the underlying commodity for Mining companies, both as a consumption and investment asset, drives the negative effect of policy uncertainty on volatility in this sector. Nevertheless, the findings highlight the predictive information captured by monetary policy actions on the idiosyncratic component of equity market volatility.lts for Mining with high policy uncertainty predicting lower volatility in this sector. We argue that the dual nature of the underlying commodity for Mining companies, both as a consumption and investment asset, drives the negative effect of policy uncertainty on volatility in this sector. Nevertheless, the findings highlight the predictive information captured by monetary policy actions on the idiosyncratic component of equity market volatility.

Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://reunido.uniovi.es/index.php/EBL/article/view/14497 (text/html)

Related works:
Working Paper: Predicting Firm-Level Volatility in the United States: The Role of Monetary Policy Uncertainty (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ove:journl:aid:14497

Access Statistics for this article

Economics and Business Letters is currently edited by Francisco J. Delgado

More articles in Economics and Business Letters from Oviedo University Press Contact information at EDIRC.
Bibliographic data for series maintained by Francisco J. Delgado ().