Treasury Bond Volatility and Uncertainty about Monetary Policy
We show that dispersion-based uncertainty about the future course of monetary policy is the single most important determinant of Treasury bond volatility across all maturities. The link between Treasury bond volatility and uncertainty about macroeconomic variables is much stronger than for the more traditional time series measures of macroeconomic volatility and adds beyond the information contained in lagged bond market volatility. Uncertainty about monetary policy subsumes the uncertainty about future inflation (consumer price index and the deflator) and economic activity (unemployment, real and nominal gross domestic product and industrial production). In addition, causality clearly runs one way: from monetary policy uncertainty to Treasury bond volatility.
|Keywords||Financial markets, Gross domestic product, Treasury securities|
|JEL||Financial Markets and the Macroeconomy (jel E44), Central Banks and Their Policies (jel E58), Asset Pricing (jel G12)|
|Persistent URL||dx.doi.org/10.1111/j.1540-6288.2010.00267.x, hdl.handle.net/1765/23936|
|Journal||The Financial Review|
Vrugt, E.B, & Arnold, I.J.M. (2010). Treasury Bond Volatility and Uncertainty about Monetary Policy. The Financial Review, 45(3), 707–728. doi:10.1111/j.1540-6288.2010.00267.x