Journal of Risk

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Monetary policy uncertainty and jumps in advanced equity markets

Elie Bouri, Konstantinos Gkillas, Rangan Gupta and Clement Kyei

  • The authors analyze the role of monetary policy uncertainty in predicting jumps
  • The authors use daily log-returns of the MSCI equity indices of nine advance equity markets
  • Linear causality test detects weak evidence of monetary policy uncertainty causing jumps
  • Using a data-driven approach we find strong evidence of causality between monetary policy uncertainty and jumps

We analyze the role of monetary policy uncertainty in predicting jumps in nine advanced equity markets. The standard linear Granger causality test detects weak evidence of monetary policy uncertainty causing jumps. But, given strong evidence of nonlinearity between jumps and monetary policy uncertainty, we next use a nonparametric causality-in-quantiles test, since the linear model is misspecified. Using this data-driven robust approach we find strong evidence of the role of monetary policy uncertainty in predicting jumps, especially toward the lower end of the conditional distribution.

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