Unconventional Policies Effects on Stock Market Volatility: A MAP Approach

TL;DR

This paper introduces a novel MEM-based model called MAP to analyze how unconventional monetary policies affect stock market volatility, demonstrating improved forecasting and quantifying effects across Eurozone markets.

Contribution

The paper develops the MAP model, integrating policy effects into volatility modeling, and applies it to Eurozone markets to assess policy impact and forecast improvements.

Findings

MAP model improves volatility forecast accuracy after policy implementation

Policy shocks reduce volatility more significantly in debt-troubled countries

Forecast horizon analysis estimates the duration of policy effects

Abstract

Taking the European Central Bank unconventional policies as a reference, we suggest a class of Multiplicative Error Models (MEM) taylored to analyze the impact such policies have on stock market volatility. The new set of models, called MEM with Asymmetry and Policy effects (MAP), 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, and, by shocking the policy variable, we are able to quantify the reduction in volatility which is more marked for debt--troubled countries.