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Predicting Firm-Level Volatility in the United States: The Role of Monetary Policy Uncertainty

Matthew Clance, Riza Demirer, Rangan Gupta and Clement Kyei

No 202007, Working Papers from University of Pretoria, Department of Economics

Abstract: This paper provides novel evidence for the predictive power of monetary policy uncertainty (MPU) over stock return volatility at the firm level based on a dataset constructed from 9,458 U.S. firms. Our findings show that monetary policy uncertainty contains significant predictive information over realized and implied volatilities at both the firm- and industry-level, with higher policy uncertainty predicting higher volatility in subsequent periods. While the strongest possible volatility effect is observed in the case of Retail Trade, we observe opposite results for Mining with high policy uncertainty predicting lower volatility in this sector. We argue that the dual nature of the underlying commodity for Mining companies, both as a consumption and investment asset, drives the negative effect of policy uncertainty on volatility in this sector. Nevertheless, the findings highlight the predictive information captured by monetary policy actions on the idiosyncratic component of equity market volatility.

Keywords: Monetary Policy Rate Uncertainty; Firm-Level Realized and Implied volatilities; Risk-Free Rate (search for similar items in EconPapers)
JEL-codes: C21 C51 C53 E52 G12 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2020-01
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