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Measuring the Effect of Unconventional Policies on Stock Market Volatility

Demetrio Lacava, Giampiero Gallo () and Edoardo Otranto ()

Papers from arXiv.org

Abstract: As a response to the Great Recession, many central banks resorted to unconventional monetary policies, in the form of a balance sheet expansion. Our research aims at analyzing the impact of the ECB policies on stock market volatility in four Eurozone countries (France, Germany, Italy, and Spain) within the Multiplicative Error Model framework. We propose a model that allows us to quantify the part of market volatility depending directly on unconventional policies by distinguishing between the announcement effect and the implementation effect. While we observe an increase in volatility on announcement days, we find a negative implementation effect, which causes a remarkable reduction in volatility in the long term. A Model Confidence Set approach finds how the forecasting power of the proxy improves significantly after the policy announcement; a multi-step ahead forecasting exercise estimates the duration of the effect, and, by shocking the policy variable, we are able to quantify the reduction in volatility which is more marked for debt-troubled countries.

Date: 2020-10
New Economics Papers: this item is included in nep-cba, nep-eec and nep-mon
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http://arxiv.org/pdf/2010.08259 Latest version (application/pdf)

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Working Paper: Measuring the Effects of Unconventional Policies on Stock Market Volatility (2020) Downloads
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