On classifying the effects of policy announcements on volatility

Abstract The financial turmoil surrounding the Great Recession called for unprecedented intervention by Central Banks: unconventional policies affected various areas in the economy, including stock market volatility. In order to evaluate such effects, by including Markov Switching dynamics within a recent Multiplicative Error Model, we propose a model–based classification of the dates of a Central Bank's announcements to distinguish the cases where the announcement implies an increase or a decrease in volatility, or no effect. In detail, we propose two smoothed probability–based classification methods, obtained as a by–product of the model estimation, which provide very similar results to those coming from a classical k–means clustering procedure. The application on four Eurozone market volatility series shows a successful classification of 144 European Central Bank announcements.