Ruhr Economic Papers

Ruhr Economic Papers #240

Does Monetary Policy Affect Stock Market Uncertainty? – Empirical Evidence from the United States

by Mario Jovanovic

RUB, 01/2011, 24 S./p., 8 Euro, ISBN 978-3-86788-275-0

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Abstract

This paper investigates the response of US stock market uncertainty to monetary policy of the Federal Reserve Bank. It can be shown that monetary policy significantly Granger-causes stock market confidence. By using monthly closing prices of the VIX as a stock market uncertainty proxy and a copula-based Markov approach the stable nonlinear relation between confidence and uncertainty is demonstrated. The monetary policy effect on stock market uncertainty is therefore separable into a linear and nonlinear part.

JEL-Classification: C12, C22, E43, E52

Keywords: Stock market confi dence; temporal dependence; copula

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