Unconventional Monetary Policies in the UK, estimating their impact using shrinkage and persistent volatility
Two main strands in econometric analysis literature for macro-econometrics and finance are structural change and volatility modelling and high-dimensional regressions. For these two strands, Ilias proposes a framework that has the potential to create a number of contributions. First, empirical work has concluded that variation in volatility is very persistent, a feature illustrated in estimated parameters that lie close to the boundary for stationarity. This implies that volatility can be characterised by persistent and possibly non-stationary processes. In this content Ilias proposes the use of a kernel volatility estimator (KVE) that has the potential to adequately fit the observed behaviour of volatility.Second, the growing availability of large datasets in the last ten years can potentially assist econometricians under the assumption that they carry rich and relevant information. Their size creates an “ill-posed” problem where even basic methods as ordinary regression cannot work. In this content Ilias proposes a different estimator that generalises the above. Specifically, he will not impose a specific number of norm-penalties but instead envisions an estimator that includes a vast number of norm-penalties, whose performance will be assessed by Cross-Validation and out of sample forecasting. The benefit of this procedures is that while agnostic to the number of norm-penalties to include apriori, a penalisation scheme is produced that can potentially work in a different way for each dataset and can yield better results. Assessing the performance of this estimator requires MC with synthetic datasets.In terms of the empirical applications, Ilias’s estimators are natural candidates to examine first the volatility that exists in stock indexes and whether parameter estimates obtained from the KVE procedure are better in forecasting. Further both the KVE as well as the shrinkage estimator can help us to potentially examine the effects unconventional monetary policies, as employed by the Bank of England, had in the real economy and whether the effect deteriorated after their initial employment.
4 – Economics, Finance & the World Economy