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Prediction of the Conditional Distribution of Daily International Stock Returns Volatility: The Role of (Conventional and Unconventional) Monetary Policies

Author

Listed:
  • Oguzhan Cepni

    (Ostim Technical University, Ankara, Turkiye; University of Edinburgh Business School, Centre for Business, Climate Change, and Sustainability; Department of Economics; Copenhagen Business School, Denmark)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa)

  • Jacobus Nel

    (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa)

  • Renee van Eyden

    (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa)

Abstract

In this paper, we use a k-th order nonparametric causality-in-quantiles test to analyze the effect of both conventional and unconventional monetary policy, captured by a single-metric (shadow rates), on high-frequency, i.e., daily international equity market volatility, while simultaneously accounting for the effect on stock returns too. Using data for the Euro Area, Sweden, the United Kingdom and the United States, we find strong evidence of causal influence over the entire conditional distribution of stock returns and its volatility, with the latter shown to be positively related to the shadow rates across various regimes. Focusing on volatility, the predictability result continues to be robust to alternative estimates of volatility and metrics of conventional and unconventional monetary policies, as well as, when we consider controls capturing high-frequency effects from the real-side of the macroeconomy. Finally, we also depict that the predictive content of monetary policy on stock market volatility based on the shadow rates is stronger than the corresponding official rates, due to the former not hitting an effective lower bound during the episodes of the global financial crisis and the coronavirus pandemic. Our findings have important implications for both investors and policymakers.

Suggested Citation

  • Oguzhan Cepni & Rangan Gupta & Jacobus Nel & Renee van Eyden, 2024. "Prediction of the Conditional Distribution of Daily International Stock Returns Volatility: The Role of (Conventional and Unconventional) Monetary Policies," Working Papers 202439, University of Pretoria, Department of Economics.
  • Handle: RePEc:pre:wpaper:202439
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    More about this item

    Keywords

    Conventional and Unconventional Monetary Policies; Advanced Economy Stock Markets Volatility; Higher-Order Nonparametric Causality-in-Quantiles Test;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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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