The impact of the FOMC and the ECB interest rate announcements on sec-tor volatilities in the European stock markets
Hutri, Mikko (2008)
2008
Kuvaus
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Tiivistelmä
The purpose of this thesis is to investigate the impact of the ECB and the FOMC interest rate announcements on stock market sector volatility. The markets studied are Finland, Germany and United Kingdom and the sectors included are financial, industrial, technology and health care. This study contributes prior studies by examining the behavior of the volatility around the interest rate announcements on the sector level, and five time windows are used for this purpose. The volatility is estimated from the daily returns of the sectors by using GARCH-method. The sample used in this study runs from 1.1.1999 to 9.5.2007 including 2178 observations.
The first hypothesis suggests sector volatility being lower than normal before the central banks interest rate announcements. The second hypothesis assumes sector volatility being abnormal on the interest rate announcement day. According to the third hypothesis, sector volatilities are hypothesized to be normal on days after the interest rate announcement.
The GARCH volatility estimate is regressed against ten dummy variables representing the days surrounding the interest rate announcements. None of the hypotheses is confirmed in all markets studied. However, in single sectors the volatilities are found to behave in line with the hypotheses. Thus, it is con-cluded that the sectors of the markets studied behave dissimilarly around the interest rate announcements of the ECB and the FED.
The first hypothesis suggests sector volatility being lower than normal before the central banks interest rate announcements. The second hypothesis assumes sector volatility being abnormal on the interest rate announcement day. According to the third hypothesis, sector volatilities are hypothesized to be normal on days after the interest rate announcement.
The GARCH volatility estimate is regressed against ten dummy variables representing the days surrounding the interest rate announcements. None of the hypotheses is confirmed in all markets studied. However, in single sectors the volatilities are found to behave in line with the hypotheses. Thus, it is con-cluded that the sectors of the markets studied behave dissimilarly around the interest rate announcements of the ECB and the FED.