The Response of Stock Market Volatility to Futures-Based Measures of Monetary Policy Shocks
Nikolay Gospodinov () and
No 2014-14, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta
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 and asymmetric response of stock returns and volatility to monetary policy shocks. Although 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 they also suggest that market participants' uncertainty regarding the monetary stance affects stock market volatility.
Keywords: stock market volatility; federal funds futures; monetary policy; variance risk premium; vector autoregression; bivariate GARCH; leverage effect; volatility feedback effect (search for similar items in EconPapers)
JEL-codes: C32 C58 E52 E58 G10 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-mac, nep-mon and nep-rmg
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Journal Article: The response of stock market volatility to futures-based measures of monetary policy shocks (2015)
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