Essays on Monetary Policy and Asset Price Volatility

In Chapter 1 of this thesis, the importance of the term structure of interest rates is discussed in terms of reflecting the general economic stance and expectations. In Chapter 2, I examine the predictive power of the Heterogeneous Autoregressive (HAR) model on government bond return volatility of major European government bond markets. The HAR-type volatility forecasting models show that short-term and medium-term volatility is a robust and statistically significant predictor of the term structure of intraday volatility. Also, I find the jump tail risk component contributes in forecasting the bond market volatility. Lastly, I show that almost half of the monetary policy announcement dates coincide with identified the jumps in bond returns, and the pre-announcement drift is present in the bond market. Hence, the monetary policy announcements are a crucial determinant of European bond market volatility. Chapter 3 shows that the latent factors of the German government bond yield curve provide sufficient information in representing euro-area monetary policy dimensions. In this context, I identify three factors to encompass the multidimensional structure of the European Central Bank’s policies: target rate, monetary policy stance, and quantitative easing. Moreover, I measure the impact of monetary policy surprises on euro area asset prices and financial market indicators around the relevant announcement windows. In Chapter 4, I examine whether the inclusion of yield curve volatility improves the stock market volatility forecasting. Using the foundations of the dividend growth model, I extend the model to incorporate and relate the shape of the yield curve that affects the transmission from bond markets to equity markets volatility. By including the risk premium and hedging premium, I show the shape of the yield curve is one of the determinants of equity market volatility and directly affects volatility through the transmission from bond volatility. Chapter 5 concludes this thesis by highlighting significant remarks, limitations, and avenues for future research.