Unconventional policies effects on stock market volatility: The MAP approach

Taking the European Central Bank unconventional policies as a reference, we suggest a class of multiplicative error models (MEMs) tailored to analyse the impact such policies have on stock market volatility. The new set of models, called MEM with asymmetry and policy effects, keeps the base volatility dynamics separate from a component reproducing policy effects, with an increase in volatility on announcement days and a decrease unfolding implementation effects. When applied to four Eurozone markets, a model confidence set approach finds a significant improvement of the forecasting power of the proxy after the expanded asset purchase programme implementation. A multi‐step ahead forecasting exercise estimates the duration of the effect; by shocking the policy variable, we are able to quantify the reduction in volatility which is more marked for debt‐troubled countries.