The Effect of Monetary Policy Announcements on Stock Market Returns and Volatility Dynamics

Posted: Apr 15, 2018

• Elijah Hill
• Elijah Lopez
• Elijah Nguyen

Abstract

The relationship between monetary policy announcements and financial market behavior represents one of the most extensively studied areas in financial economics. Traditional approaches have predominantly relied on event study methodologies and conventional time-series econometrics to quantify market responses to policy surprises. However, these methods often fail to capture the complex, non-linear dynamics that characterize market reactions, particularly the quantum-like nature of uncertainty resolution during policy announcements. This research introduces a groundbreaking methodological framework that bridges quantum computational principles with financial econometrics to provide novel insights into monetary policy transmission mechanisms. Our investigation is motivated by several limitations in existing literature. First, conventional models typically assume that market expectations exist in a single determinate state prior to announcements, overlooking the superposition of multiple potential expectation states. Second, traditional volatility models struggle to capture the rapid information assimilation and volatility dynamics that occur in the immediate aftermath of policy revelations. Third, existing approaches often neglect the interconnected nature of market reactions across different asset classes and time horizons. This paper makes three primary contributions to the literature. Methodologically, we develop a Quantum-Enhanced GARCH framework that incorporates quantum probability amplitudes to model pre-announcement uncertainty states and their collapse into definitive market reactions. Empirically, we demonstrate that this approach provides superior predictive accuracy for post-announcement volatility dynamics compared to traditional models. Theoretically, we introduce a novel conceptualization of monetary policy transmission that accounts for quantum-like correlations and threshold effects in market behavior.