Open AccessThe role of monetary policy uncertainty in predicting equity market volatility of the United Kingdom: evidence from over 150 years of data
Author(s) -
Rangan Gupta,
Mark E. Wohar
Publication year - 2019
Publication title -
economics and business letters
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.197
H-Index - 4
ISSN - 2254-4380
DOI - 10.17811/ebl.8.3.2019.138-146
Subject(s) - economics , equity (law) , volatility (finance) , monetary policy , monetary economics , financial economics , stock market , implied volatility , econometrics , paleontology , horse , political science , law , biology
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.