Central Bank Announcements and Realized Volatility of Stock Markets in G7 Countries

Abstract

We investigate the impact of monetary policy announcements on stock market volatility in the U.S., Canada, Japan, the U.K., Germany, France and Italy during the 2006-2016 period. More specifically, we study the impact of policy rate and quantitative easing announcements of domestic and foreign central banks on realized volatility before, during, and after the event. We find that on the day of an interest rate announcement of the domestic central bank, volatility increases in a manner that is both statistically and economically significant. We also find a decline in volatility five days after an interest rate announcement across all countries in our sample. We further find that quantitative easing announcements have no impact on stock market volatility not only at but also five days before and five days after the announcement date.

Keywords: Target Interest Rate, Realized Volatility, Central Banks, High-Frequency Data, Monetary Policy

JEL Classification: C22, E44, G14, G15