Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/101038
Authors: 
Gospodinov, Nikolay
Jamali, Ibrahim
Year of Publication: 
2014
Series/Report no.: 
Working Paper, Federal Reserve Bank of Atlanta 2014-14
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.
Subjects: 
stock market volatility
federal funds futures
monetary policy
variance risk premium
vector autoregression
bivariate GARCH
leverage effect
volatility feedback effect
JEL: 
C32
C58
E52
E58
G10
G12
Document Type: 
Working Paper

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