Measuring the Effects of Unconventional Policies on Stock Market Volatility

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See all articles by Demetrio Lacava

Demetrio Lacava

University of Messina - Department of Economics

Giampiero M. Gallo

Corte dei Conti - Italian Court of Audits; University of Bologna - Rimini Center for Economic Analysis (RCEA); Universita' di Firenze - Dipartimento di Statistica, Informatica, Applicazioni "G.Parenti"

Edoardo Otranto

University of Messina; Universita di Cagliari - Centre for North South Economic Research (CRENOS)

Date Written: October 16, 2020

Abstract

As a response to the Great Recession, many central banks resorted to unconventional monetary policies, in the form of a balance sheet expansion. Our research aims at analyzing the impact of the ECB policies on stock market volatility in four Eurozone countries (France, Germany, Italy, and Spain) within the Multiplicative Error Model framework. We propose a model that allows us to quantify the part of market volatility depending directly on unconventional policies by distinguishing between the announcement and the implementation effects. While we observe an increase in volatility on announcement days, we find a negative implementation effect, which causes a remarkable reduction in volatility in the long term. A Model Confidence Set approach finds how the forecasting power of the proxy improves significantly after the policy announcement; a multi-step ahead forecasting exercise estimates the duration of the effect, and, by shocking the policy variable, we are able to quantify the reduction in volatility which is more marked for debt-troubled countries.

Keywords: Unconventional monetary policy, Financial market, Realized Volatility, Multiplicative Error Model, Model Confidence Set.

JEL Classification: C32, C58, E44, E52, E58, G17

Suggested Citation

Lacava, Demetrio and Gallo, Giampiero M. and Otranto, Edoardo, Measuring the Effects of Unconventional Policies on Stock Market Volatility (October 16, 2020). Available at SSRN: https://ssrn.com/abstract=

Demetrio Lacava

University of Messina - Department of Economics ( email )

Via T. Cannizzaro 278
Messina, 98122
Italy

Giampiero M. Gallo (Contact Author)

Corte dei Conti - Italian Court of Audits ( email )

viale Mazzini
Roma, Roma 00195
Italy

University of Bologna - Rimini Center for Economic Analysis (RCEA) ( email )

Via Patara, 3
Rimini (RN), RN 47900
Italy

Universita' di Firenze - Dipartimento di Statistica, Informatica, Applicazioni "G.Parenti" ( email )

Viale G.B. Morgagni, 59
Florence, 50134
Italy
0039 055 2751 591 (Phone)
0039 055 4223560 (Fax)

HOME PAGE: http://www.disia.unifi.it/gallog

Edoardo Otranto

University of Messina ( email )

Piazza Pugliatti, 1
Messina, 98122
Italy

Universita di Cagliari - Centre for North South Economic Research (CRENOS) ( email )

V. S. Ignazio 78
Cagliari, 09124
Italy

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