Identification Through Heteroscedasticity in a Multicountry and Multimarket Framework

24 Pages Posted: 10 Jun 2011

See all articles by Bernd Hayo

Bernd Hayo

University of Marburg - School of Business & Economics

Britta Niehof

University of Marburg

Date Written: June 9, 2011

Abstract

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 e ects. 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 signi ficant impact on financial markets. Third, we discover that ECB monetary policy moves have spillover eff ects on the British and Swiss financial markets, but find no evidence of reverse causality.

Keywords: Financial markets, instrumental variable estimation, identi cation through heteroscedasticity, spillover effects

JEL Classification: C36, E44, E52, G15

Suggested Citation

Hayo, Bernd and Niehof, Britta, Identification Through Heteroscedasticity in a Multicountry and Multimarket Framework (June 9, 2011). Available at SSRN: https://ssrn.com/abstract=1860827 or http://dx.doi.org/10.2139/ssrn.1860827

Bernd Hayo (Contact Author)

University of Marburg - School of Business & Economics ( email )

Universitaetsstr. 24
Marburg, D-35032
Germany
++49(0)6421-28-23091 (Phone)
++49(0)6421-28-23193 (Fax)

Britta Niehof

University of Marburg ( email )

Universitätsstrasse 24
D-35032 Marburg, D-35032
Germany

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