Identification Through Heteroscedasticity in a Multicountry and Multimarket Framework
24 Pages Posted: 10 Jun 2011
Date Written: June 9, 2011
This paper formally proves that Rigobon and Sack (2004)'s approach of identifying monetary policy shocks through heteroscedasticity can be extended to a multimarket and multicountry framework. Applying our multivariate framework allows deriving consistent estimators of monetary policy eects. The advantage of our extended approach is illustrated by applying it to European financial markets. We analyse monetary policy actions of the European Central Bank (ECB), the Bank of England, the Swiss National Bank, and the Swedish Riksbank on major stock indices. First, in line with the Rigobon and Sack (2004) approach, we find an increase in the variance of European stock and money market returns on days when monetary policy committee meetings are held. Second, monetary policy actions have a significant impact on financial markets. Third, we discover that ECB monetary policy moves have spillover effects on the British and Swiss financial markets, but find no evidence of reverse causality.
Keywords: Financial markets, instrumental variable estimation, identication through heteroscedasticity, spillover effects
JEL Classification: C36, E44, E52, G15
Suggested Citation: Suggested Citation