Risk aversion, uncertainty, and monetary policy: Structural vector autoregressions identified with high-frequency external instruments

2020 ◽  
Vol 186 ◽  
pp. 108675 ◽  
Author(s):  
Woon Wook Jang
Keyword(s):  
Monetary Policy ◽  
Risk Aversion ◽  
High Frequency ◽  
Vector Autoregressions ◽  
Structural Vector

scholarly journals Monetary policy effects on equity returns: application of SVAR identified with high-frequency external instrument

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Woon Wook Jang
Keyword(s):  
Monetary Policy ◽  
Risk Premium ◽  
High Frequency ◽  
Equity Returns ◽  
Structural Vector Autoregression ◽  
Excess Returns ◽  
Identification Approach ◽  
Econometric Approach ◽  
Cash Flow News ◽  
Structural Vector

The purpose of this study is to examine the effects of monetary policy on equity returns by applying an alternative econometric approach. Campbell and Ammer (1993) decomposed unexpected equity excess returns into three news components: risk premium news, real interest rate news and cash-flow news. The literature has determined the monetary policy (MP) effects on these news components. The authors propose an alternative MP shock identification approach to analyze the MP effects on the above-mentioned news components under a structural vector autoregression (SVAR) setup. Under this approach, one can apply an MP indicator in the SVAR, which helps forecast equity excess returns along with its external instruments for identification. Further, this study uses the various recently proposed measures of exogenous MP shocks and Fed information shocks as external instruments, and shows the different patterns of the news components' responses depending on the information in the applied instruments.

scholarly journals Deconstructing Monetary Policy Surprises— The Role of Information Shocks

2020 ◽  
Vol 12 (2) ◽  
pp. 1-43 ◽  
Author(s):  
Marek Jarociński ◽  
Peter Karadi
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Interest Rates ◽  
Stock Prices ◽  
High Frequency ◽  
Structural Vector Autoregression ◽  
Role Of Information ◽  
Structural Vector ◽  
Economic Outlook

Central bank announcements simultaneously convey information about monetary policy and the central bank's assessment of the economic outlook. This paper disentangles these two components and studies their effect on the economy using a structural vector autoregression. It relies on the information inherent in high-frequency co-movement of interest rates and stock prices around policy announcements: a surprise policy tightening raises interest rates and reduces stock prices, while the complementary positive central bank information shock raises both. These two shocks have intuitive and very different effects on the economy. Ignoring the central bank information shocks biases the inference on monetary policy nonneutrality. (JEL D83, E43, E44, E52, E58, G14)

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