Intraday Volatility Responses to Monetary Policy Events

Financial Markets and Portfolio Management, Vol. 23, No. 4, pp. 383-399, 2009

Posted: 19 Jun 2010

See all articles by Asger Lunde

Asger Lunde

Aarhus University - School of Economics and Management; CREATES

Allan A. Zebedee

Clarkson University

Date Written: October 13, 2009

Abstract

This paper explores the effects of US monetary policy events on intraday volatility in the US equity markets. We examine Federal Open Market Committee (FOMC) announcements as well as real-time changes in market expectations about future policy announcements and their impact on the intraday volatility dynamics of the S&P 500 index. The analysis shows elevated intraday volatility following FOMC announcements through the market close, with a spike at the time of the announcement. We then differentiate the volatility spike by modeling an asymmetric response based on the direction of the actual target rate change. Our results suggest that the size of the volatility spike is dependent on the direction of the rate change, with expansionary monetary policy actions having a larger spike than contractionary policy actions. The duration of these volatility spikes is relatively short-lived, with the spike dampening out within 15 minutes. A more lasting impact is, however, documented for real-time changes in market expectations where the volatility spike tends to persist for at least one hour.

Keywords: Monetary policy, Exchange traded funds, Intraday volatility, High-frequency data

JEL Classification: C22, G11, G12

Suggested Citation

Lunde, Asger and Zebedee, Allan A., Intraday Volatility Responses to Monetary Policy Events (October 13, 2009). Financial Markets and Portfolio Management, Vol. 23, No. 4, pp. 383-399, 2009. Available at SSRN: https://ssrn.com/abstract=1626346

Asger Lunde

Aarhus University - School of Economics and Management ( email )

Aarhus
Denmark

CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Allan A. Zebedee (Contact Author)

Clarkson University ( email )

Potsdam, NY 13699-5780
United States
315.268.3890 (Phone)

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