Measuring the Effects of Unconventional Policies on Stock Market Volatility

Giampiero Gallo (), D. Lacava and Edoardo Otranto

Working Paper CRENoS from Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia

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 which allows us to quantify the part of market volatility depending directly on unconventional policies by distinguishing between the announcement the implementation effects. 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.

Keywords: Unconventional monetary policy; realized volatility; Multiplicative Error Model; Model Confidence Set; Financial market (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-fmk and nep-for
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:cns:cnscwp:202006

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