Does Monetary Policy Affect Stock Market Uncertainty? Empirical Evidence from the United States

Abstract

This paper investigates the response of US stock market uncertainty to monetary policy of the Federal Reserve Bank. It can be shown that monetary policy significantly Granger-causes stock market confidence. By using monthly closing prices of the V IX as a stock market uncertainty proxy and a copula-based Markov approach the stable nonlinear relation between confi dence and uncertainty is demonstrated. The monetary policy effect on stock market uncertainty is therefore separable into a linear and nonlinear part.

Keywords: Stock market confidence, temporal dependence, copula

JEL Classification: C12, C22, E43, E52