The Response of Stock Market Volatility to Futures-Based Measures of Monetary Policy Shocks

33 Pages Posted: 4 Apr 2015

See all articles by Nikolay Gospodinov

Nikolay Gospodinov

Federal Reserve Bank of Atlanta

Ibrahim Jamali

American University of Beirut

Date Written: August 1, 2014

Abstract

In this paper, we investigate the dynamic response of stock market volatility to changes in monetary policy. Using a vector autoregressive model, our findings reveal a significant and asymmetric response of stock returns and volatility to monetary policy shocks. Although the increase in the volatility risk premium, futures-trading volume, and leverage appear to contribute to a short-term increase in volatility, the longer-term dynamics of volatility are dominated by monetary policy's effect on fundamentals. The estimation results from a bivariate VAR-GARCH model suggest that the Fed does not respond to the stock market at a high frequency, but they also suggest that market participants' uncertainty regarding the monetary stance affects stock market volatility.

Keywords: stock market volatility, federal funds futures, monetary policy, variance risk premium, vector autoregression, bivariate GARCH, leverage effect, volatility feedback effect

JEL Classification: C32, C58, E52, E58, G10, G12

Suggested Citation

Gospodinov, Nikolay and Jamali, Ibrahim, The Response of Stock Market Volatility to Futures-Based Measures of Monetary Policy Shocks (August 1, 2014). FRB Atlanta Working Paper No. 2014-14. Available at SSRN: https://ssrn.com/abstract=2580437 or http://dx.doi.org/10.2139/ssrn.2580437

Nikolay Gospodinov (Contact Author)

Federal Reserve Bank of Atlanta ( email )

Atlanta, GA 30309
United States

HOME PAGE: https://www.frbatlanta.org/research/economists/gospodinov-nikolay.aspx?panel=1

Ibrahim Jamali

American University of Beirut ( email )

Beirut, 0236
Lebanon

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