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Evolving United States Stock Market Volatility: The Role of Conventional and Unconventional Monetary Policies

Vasilios Plakandaras, Rangan Gupta, Mehmet Balcilar and Qiang Ji

No 202113, Working Papers from University of Pretoria, Department of Economics

Abstract: Despite the econometric advances of the last 30 years, the effects of monetary policy stance during the boom and busts of the stock market are not clearly defined. In this paper, we use a structural heterogenous vector autoregressive (SHVAR) model with identified structural breaks to analyze the impact of both conventional and unconventional monetary policies on the U.S. stock market volatility. We find that contractionary monetary policy enhances stock market volatility, but the importance of monetary policy shocks in explaining volatility evolves across different regimes and is relative to supply shocks (and shocks to volatility itself). In comparison to business cycle fluctuations, monetary policy shocks explain a greater fraction of the variance of stock market volatility at shorter horizons, as in medium to longer horizons. Our basic findings of a positive impact of monetary policy on equity market volatility (being relatively stronger during calmer stock markets periods) is also corroborated by analyses conducted at the daily frequency based on an augmented heterogenous autoregressive model of realized volatility (HAR-RV) and a multivariate k-th order nonparametric causality-in-quantiles framework, respectively. Our results have important implications both for investors and policymakers.

Keywords: Stock Market Volatility; Conventional and Unconventional Monetary Policies; Structural Breaks; Structural Heterogenous Vector Autoregressive Model; Multivariate Nonparametric higher-Order Causality-in-Quantiles Test; Intraday Data (search for similar items in EconPapers)
JEL-codes: C22 C32 E32 E52 G10 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2021-02
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-mac and nep-rmg
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