Asymmetric effects of U.S. monetary policy on stock market volatility: an analysis using asymmetric GARCH model

Abstract

This thesis examines the asymmetric effects of U.S. monetary policy and interest rates on the volatility of returns in the stock market of emerging countries using an asymmetric generalized autoregressive conditional heteroscedasticity model. The model incorporates the interest rate movements in the U.S. in the conditional variance equation and uses a dummy to explicate the asymmetric response of the volatility of the returns. Using daily returns data of 14 indices from a selection of countries and creating a dummy variable for the daily federal funds rate, the results show that the response of volatility to the contractionary movement in interest rate is significantly higher than the expansionary movement. The results also the differences in the response across the countries given the heterogeneity in global trade integration, financial structure, and financial developments. Moreover, the high-frequency identification of monetary policy surprises is also used for the analyses of the response of monetary policy. This exercise shows that the markets perceive the contractionary policy differently and differentiate between growth shocks and pure monetary policy shocks as well as the information effect of the FOMC decisions on the meeting dates.