Beschreibung:
The paper investigates the effect of monetary policy uncertainty on stock return volatility. Contrary to the widely accepted wisdom that higher uncertainty leads to higher volatility, we find that monetary policy uncertainty negatively predicts stock return volatility both in and out of sample at the monthly frequency. The forecasting performance is robust even after controlling for a comprehensive set of economic variables. Economic uncertainty, other policy uncertainty, and economic conditions can not explain the negative relationship. At the portfolio level, the effect of monetary policy uncertainty is greater for big firms, profitable firms, and past winner firms. Economic sources of predictability are also explored. Both the cash flow volatility channel and the future discount rate volatility channel contribute to this negative relationship. When decomposing volatility into good and bad volatility, the predictive ability of monetary policy uncertainty arises primarily from information on future downside risk