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Financial Market Risk and the Macroeconomy

Megaritis, Anastasios (2022) Financial Market Risk and the Macroeconomy. PhD thesis, University of Essex.

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Abstract

The first chapter of this thesis is about the predictive power of latent macroeconomic uncertainty on U.S. stock market volatility and price jumps. I find that increasing macroeconomic uncertainty predicts a subsequent rise in volatility and price jumps in the U.S. stock market. Specifically, the latent macroeconomic uncertainty measures of Jurado et al. (2015) have the most significant impact on U.S. stock market volatility and jumps in the equity market when compared to the respective impact of popular observable uncertainty proxies. In the second chapter, I empirically verify the predictive information content of U.S. Treasury yield curve volatility on stock market volatility. Given the fact that, the yield curve reflects expectations about future interest rates and economic activity, then the rising volatility in the shape of the yield curve will probably result to rising stock market volatility. I document that the volatility of the slope of the yield curve is a statistically significant predictor of stock market volatility in both in-sample and out-of-sample settings. Lastly, I examine the dynamic impact of monetary policy on option-implied expectations. I use option contracts of S&P 500 index in order to estimate the higher order moments of the risk neutral option-implied distribution of the U.S. stock market. I find that an expansionary monetary policy shock revises upwardly the investors’ expectations about the future path of the U.S. equities prices, that is in line with the empirical results of a vast relevant literature (Rigobon and Sack, 2003; Kurov et al., 2019; amongst others). Furthermore, I find that option-implied expectations with long-term horizon are more responsive to lax monetary policy compared to those with short-term horizon. My findings are in line and provide further insights to a recently growing literature on the field (Hanson and Stein, 2015; Kontonikas and Zekaite, 2018; Nakamura and Steinsson, 2018).

Item Type: Thesis (PhD)
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Essex Business School > Essex Finance Centre
Depositing User: Anastasios Megaritis
Date Deposited: 23 May 2022 12:42
Last Modified: 23 May 2022 12:42
URI: http://repository.essex.ac.uk/id/eprint/32869

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