On Classifying the Effects of Policy Announcements on Volatility
|Title||On Classifying the Effects of Policy Announcements on Volatility|
|Publication Type||Working Paper|
|Year of Publication||2020|
|Authors||Gallo, GM, Lacava, D, Otranto, E|
|ISBN Number||978 88 68513 290|
|Keywords||Markov 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.