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Identification Through Heteroscedasticity in a Multicountry and Multimarket Framework

Author

Listed:
  • Bernd Hayo

    () (University of Marburg)

  • Britta Niehof

    () (University of Marburg)

Abstract

This paper formally proves that Rigobon and Sack (2004)'s approach of identifying monetary policy shocks through heteroscedasticity can be extended to a multimarket and multicountry framework. Applying our multivariate framework allows deriving consistent estimators of monetary policy effects. The advantage of our extended approach is illustrated by applying it to European financial markets. We analyse monetary policy actions of the European Central Bank (ECB), the Bank of England, the Swiss National Bank, and the Swedish Riksbank on major stock indices. First, in line with the Rigobon and Sack (2004) approach, we find an increase in the variance of European stock and money market returns on days when monetary policy committee meetings are held. Second, monetary policy actions have a significant impact on financial markets. Third, we discover that ECB monetary policy moves have spillover effects on the British and Swiss financial markets, but find no evidence of reverse causality.

Suggested Citation

  • Bernd Hayo & Britta Niehof, 2011. "Identification Through Heteroscedasticity in a Multicountry and Multimarket Framework," MAGKS Papers on Economics 201124, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  • Handle: RePEc:mar:magkse:201124
    as

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    File URL: http://www.uni-marburg.de/fb02/makro/forschung/magkspapers/24-2011_hayo.pdf
    File Function: First version, 2011
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    References listed on IDEAS

    as
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    Cited by:

    1. Haitsma, Reinder & Unalmis, Deren & de Haan, Jakob, 2016. "The impact of the ECB's conventional and unconventional monetary policies on stock markets," Journal of Macroeconomics, Elsevier, vol. 48(C), pages 101-116.

    More about this item

    Keywords

    Financial markets; instrumental variable estimation; identification through heteroscedasticity; spillover effects;

    JEL classification:

    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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