Testing the Dimensionality of Policy Shocks
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Abstract This paper provides a nonparametric test for deciding the dimensionality of a policy shock as manifest in the abnormal change in asset returns' stochastic covariance matrix, following the release of a macroeconomic announcement. We use high-frequency data in local windows before and after the event to estimate the covariance jump matrix, and then test its rank. We find a one-factor structure in the covariance jump matrix of the yield curve resulting from the Federal Reserve's monetary policy shocks prior to the 2007-2009 financial crisis. The dimensionality of policy shocks increased afterwards due to the use of unconventional monetary policy tools.
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2003 ◽
Vol 1
(5)
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pp. 1031-1057
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2015 ◽
Vol 7
(1)
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pp. 44-76
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Understanding the Impact of Monetary Policy in Korea using a Macro-Finance Term Structure Model with
2014 ◽
Vol 22
(2)
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pp. 161-192
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2019 ◽
Vol 27
(4)
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pp. 422-442
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