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Treasury Bond Volatility and Uncertainty about Monetary Policy

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Author Info

  • Ivo J. M. Arnold
  • Evert B. Vrugt

Abstract

We show that dispersion-based uncertainty about the future course of monetary policy is the single most important determinant of Treasury bond volatility across all maturities. The link between Treasury bond volatility and uncertainty about macroeconomic variables is much stronger than for the more traditional time series measures of macroeconomic volatility and adds beyond the information contained in lagged bond market volatility. Uncertainty about monetary policy subsumes the uncertainty about future inflation (consumer price index and the deflator) and economic activity (unemployment, real and nominal gross domestic product and industrial production). In addition, causality clearly runs one way: from monetary policy uncertainty to Treasury bond volatility. Copyright (c) 2010, The Eastern Finance Association.

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Bibliographic Info

Article provided by Eastern Finance Association in its journal Financial Review.

Volume (Year): 45 (2010)
Issue (Month): 3 (08)
Pages: 707-728

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Handle: RePEc:bla:finrev:v:45:y:2010:i:3:p:707-728

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Web page: http://www.easternfinance.org/
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Cited by:
  1. Muhammad Ali Nasir & Alaa M. Soliman, 2014. "Aspects of Macroeconomic Policy Combinations and Their Effects on Financial Markets," Economic Issues Journal Articles, Economic Issues, vol. 19(1), pages 95-118, March.
  2. Goodell, John W. & Vähämaa, Sami, 2013. "US presidential elections and implied volatility: The role of political uncertainty," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 1108-1117.
  3. Taylor, Nick, 2014. "The rise and fall of technical trading rule success," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 286-302.

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