| Affiliation: | (1) University of Maine, 5774 Stevens Hall, 04469 Orono, ME;(2) College of Liberal Arts, Pennsylvania State University, 116 Sparks Building, 16802 University Park, PA |
| Abstract: | The dynamic relationship linking the volatility of equity prices with “the news” and the expected path for monetary policy is investigated. Previous results that link the impact of the news about real activity to changes in current and future interest rates are employed in developing a positive link between changes in volatility and the news. Empirically, our results uncover a positive and statistically significant response of the CBOE volatility index, VIX, to unanticipated changes in employment, but not to inflation. Hence, agents' expectations for the policy response to news have an important influence on the expected volatility of stock prices. (JEL E44, E52) |
