Conventional and Unconventional Monetary Policy Rate Uncertainty and Stock Market Volatility: A Forecasting Perspective

Ruipeng Liu, Rangan Gupta and Elie Bouri ()
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Ruipeng Liu: Department of Finance, Deakin Business School, Deakin University, Melbourne, VIC 3125, Australia

No 202178, Working Papers from University of Pretoria, Department of Economics

Abstract: Theory suggests the existence of a bi-directional relationship between stock market volatility and monetary policy rate uncertainty. In light of this, we forecast volatilities of equity markets and shadow short rates (SSR) - a common metric of both conventional and unconventional monetary policy decisions, by applying a bivariate Markov-switching multifractal (MSM) model. Using daily data of eight advanced economies (Australia, Canada, Euro area, Japan, New Zealand, Switzerland, the UK, and the US) over the period of January, 1995 to March, 2021, we find that the bivariate MSM model outperforms, in a statistically significant manner, not only the benchmark historical volatility and the univariate MSM models, but also the Dynamic Conditional Correlation-Generalized Autoregressive Conditional Heteroskedasticity (DCC-GARCH) framework, particularly at longer forecast horizons. This finding confirms the bi-directional relationship between stock market volatility and uncertainty surrounding conventional and unconventional monetary policies, which in turn has important implications for academics, investors and policymakers.

Keywords: Shadow short rate uncertainty; Stock market volatility; Markov-switching multifractal model (MSM); Forecasting (search for similar items in EconPapers)
JEL-codes: C22 C32 C53 D80 E52 G15 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2021-11
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-for, nep-mac, nep-mon and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:pre:wpaper:202178

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