Identification Through Heteroscedasticity in a Multicountry and Multimarket Framework
Bernd Hayo () and
Britta Niehof ()
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Britta Niehof: University of Marburg
No 201124, MAGKS Papers on Economics from Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung)
This paper formally proves that Rigobon and Sack (2004)'s approach of identifying monetary policy shocks through heteroscedasticity can be extended to a multimarket and multicountry framework. Applying our multivariate framework allows deriving consistent estimators of monetary policy effects. The advantage of our extended approach is illustrated by applying it to European financial markets. We analyse monetary policy actions of the European Central Bank (ECB), the Bank of England, the Swiss National Bank, and the Swedish Riksbank on major stock indices. First, in line with the Rigobon and Sack (2004) approach, we find an increase in the variance of European stock and money market returns on days when monetary policy committee meetings are held. Second, monetary policy actions have a significant impact on financial markets. Third, we discover that ECB monetary policy moves have spillover effects on the British and Swiss financial markets, but find no evidence of reverse causality.
Keywords: Financial markets; instrumental variable estimation; identification through heteroscedasticity; spillover effects (search for similar items in EconPapers)
JEL-codes: C36 E44 E52 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:mar:magkse:201124
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