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Connectedness between monetary policy uncertainty and sectoral stock market returns: Evidence from asymmetric TVP-VAR approach

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  • Raza, Syed Ali
  • Sharif, Arshian
  • Kumar, Satish
  • Ahmed, Maiyra

Abstract

In this study, we have examined the asymmetric dissemination of spillover returns among monetary policy uncertainty and returns of sectoral stocks of different sectors. The essential contribution of this study is the analysis of deviating levels of spillover returns among uncertainty of monetary policy and stocks returns for diverse segments. Additionally, we have applied an advance technique named “TVP-VAR” for data analysis to measure dynamic connectedness and execute dynamic portfolio exercise via different hedging methods in order to apprehend asymmetry; as this technique is based on a time-varying vector autoregressive approach. The dataset used in this study employs a sample of more than 30 years of daily observations obtained from October 9, 1989 to October 10, 2022 to closely examine the connection among the series. The sample covers most of the financial and economic catastrophes to study the connection among Monetary Policy Uncertainty-MPU and returns of sectoral stocks. The findings highlight that negative connectedness dominates the whole duration; thus, signifying that financiers and investors react more intensely to negative information or news. The analysis further points that the Minimum-Connected Portfolio (MCP) and Minimum-Correlation Portfolio (MPC) techniques are efficacious in apprehending asymmetry and deliver significant understanding for portfolio management. Moreover, the results imply that these approaches can assist financiers and investors to attain effective and efficient financing. Lastly, the findings of this analysis offer valuable implications for financiers and policymakers for portfolio management and observing financial stability.

Suggested Citation

  • Raza, Syed Ali & Sharif, Arshian & Kumar, Satish & Ahmed, Maiyra, 2023. "Connectedness between monetary policy uncertainty and sectoral stock market returns: Evidence from asymmetric TVP-VAR approach," International Review of Financial Analysis, Elsevier, vol. 90(C).
    • Handle: RePEc:eee:finana:v:90:y:2023:i:c:s1057521923004623
    DOI: 10.1016/j.irfa.2023.102946
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