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The Effects of Monetary Policy Shocks on a Panel of Stock Market Volatilities: A Factor-Augmented Bayesian VAR Approach

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  • Fady Barsoum

    () (Department of Economics, University of Konstanz, Germany)

Abstract

This paper investigates the response of stock market volatility to a monetary policy shock using a structural factor-augmented Bayesian vector autoregressive (FAVAR) model. We construct a monthly dataset of realized volatilities of the constituents of the S&P500 index and extract volatility factors from this dataset using a suitable dynamic factor model (DFM). The volatility factors are included in a structural FAVAR model where the dynamic response of stock market volatility to a monetary policy shock is analyzed. This approach does not only allow us to study the response of the aggregate market volatility but also the responses of all the volatilities of the single stocks and the different sectors included in the dataset. In general, the results show that the stock market returns decrease and the stock market volatility increases following a monetary policy tightening. Although the magnitude of the volatility response to monetary policy shocks varies between the different stocks and sectors, the dynamics of the response does not differ widely. Both the magnitude and dynamics of the volatility response depend on the sample period examined.

Suggested Citation

  • Fady Barsoum, 2013. "The Effects of Monetary Policy Shocks on a Panel of Stock Market Volatilities: A Factor-Augmented Bayesian VAR Approach," Working Paper Series of the Department of Economics, University of Konstanz 2013-15, Department of Economics, University of Konstanz.
  • Handle: RePEc:knz:dpteco:1315
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    File URL: http://www.uni-konstanz.de/FuF/wiwi/workingpaperseries/WP_15-Barsoum_2013.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    dynamic factor model; Bayesian estimation; factor-augmented vector autoregression; monetary policy; stock market volatility; long memory;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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