The role of monetary policy uncertainty in predicting equity market volatility of the United Kingdom: evidence from over 150 years of data
DOI:
https://doi.org/10.17811/ebl.8.3.2019.138-146Abstract
Theory suggests a strong link between monetary policy rate uncertainty and equity return volatility, since asset pricing models assume the risk-free rate to be a key factor for equity prices. Given this, our paper uses historical monthly data for the United Kingdom over 1833:01 to 2018:07, to show that monetary policy uncertainty increases stock market volatility within sample. In addition, we show that the information on monetary policy uncertainty also adds value to forecasting out-of-sample equity market volatility.
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