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On Classifying the Effects of Policy Announcements on Volatility

Giampiero Gallo (), D. Lacava and E. Otranto ()

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

Abstract: The financial turmoil surrounding the Great Recession called for unprecedented intervention by Central Banks - unconventional policies affected various areas in the economy, including stock market volatility. In order to evaluate such effects, by including Markov Switching dynamics within a recent Multiplicative Error Model, we propose a model–based classification of the dates of a Central Bank's announcements to distinguish the cases where the announcement implies an in- crease or a decrease in volatility, or no effect. In detail, we propose two naïve classification methods, obtained as a by– product of the model estimation, which provide very similar results to those coming from a classical k–means clustering procedure. The application on four Eurozone market volatility series shows a successful classification of 144 European Central Bank announcements.

Keywords: Markov switching model; Unconventional monetary policies; Stock market volatility; Multiplicative Error Model; Smoothed Probabilities; Model–based clustering. (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-ecm and nep-eec
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https://crenos.unica.it/crenos/node/7308
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