On Classifying the Effects of Policy Announcements on Volatility

TitleOn Classifying the Effects of Policy Announcements on Volatility
Publication TypeWorking Paper
Year of Publication2020
AuthorsGallo, GM, Lacava, D, Otranto, E
ISBN Number978 88 68513 290
KeywordsMarkov switching model, Model–based clustering., Multiplicative Error Model, Smoothed Probabilities, Stock market volatility, Unconventional monetary policies

The financial turmoil surrounding the Great Recession called for unprecedented intervention by Central Banks: unconventional policies affected various areas in the economy, including stock market volatility. In order to evaluate such effects, by including Markov Switching dynamics within a recent Multiplicative Error Model, we propose a model–based classification of the dates of a Central Bank’s announcements to distinguish the cases where the announcement implies an in- crease or a decrease in volatility, or no effect. In detail, we propose two naïve classification methods, obtained as a by– product of the model estimation, which provide very similar results to those coming from a classical k–means clustering procedure. The application on four Eurozone market volatility series shows a successful classification of 144 European Central Bank announcements.

Citation Key7308
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