Abstract:
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.
