Europe stocks close higher after Yellen; up 1% on the week; VW rallies 3%

European stocks seesawed in afternoon trade and closed higher as investors reacted to a speech from Federal Reserve Chair Janet Yellen.

The pan-European STOXX 600 (^STOXX) closed 0.6 percent higher provisionally after seeing strong fluctuations around 3.00 p.m. London time as Yellen spoke. The U.K.'s FTSE 100 (FTSE International: .FTSE) closed 0.4 percent higher with the French CAC 40 (Euronext Paris: .FCHI) and the German DAX (^GDAXI) seeing similar gains.

In the much-anticipated speech at the central bank's annual Jackson Hole summit, Yellen voiced optimism about the economy and an expectation that interest rate hikes were ahead. Speaking as the market wonders when the Fed will resume a policy tightening that began in December, Yellen issued some cautionary tones, but pointed to more increases on the horizon. Several asset markets saw wild swings after the speech and U.S. stocks were trading higher by Europe's close.

"Yellen's acknowledgement that 'the case for an increase in the federal funds rate has strengthened' would appear to increase the likelihood of a near-term rate hike. On balance, however, we think most officials will want to see more concrete evidence of a rebound in GDP growth and a rise in inflation towards the 2 percent target, with a December move still appearing the most likely outcome," Andrew Hunter a U.S. economist at Capital Economics, said in a note.

This came after a number of Fed officials gave media interviews on Thursday. Kansas City Federal Reserve President Esther George, a voting member on the central bank's policymaking panel, told CNBC that she was in favor of gradually raising rates. Stanley Fischer, the Fed's vice chair, said that the central bank's board are debating the state of the U.S. economy and what policy steps to take.

In individual stock news, Volkswagen (XETRA:VOW3-DE) shares closed around 3 percent higher after Reuters reported that the embattled German carmaker had agreed to spend over $1.2 billion to compensate U.S. dealers that made losses in relation to the emissions scandal.

Gemalto (Euronext Amsterdam: GTO-NL) reported a rise in first-half adjusted profit from operations while confirming its 2016 outlook, sending shares of the Dutch software maker to close higher by over 7 percent.

Meanwhile, shares of BAE Systems (London Stock Exchange: BA.-GB) closed in positive territory, up around 2 percent, after Berenberg raised its price target for the stock.

Elsewhere, the spat between Italian broadcaster Mediaset (Milan Stock Exchange: MS-IT) and France's Vivendi (Euronext Paris: VIV-FR) continued. Vivendi said the binding share-swap agreement it signed with Mediaset in which it agreed to buy its pay-TV business, could be void after September 30. Mediaset hit back, saying that Vivendi's claims had no legal or commercial basis. Reuters however, cited sources suggesting that negotiations between the two companies continued behind the scenes. Shares of both Mediaset and Vivendi both closed lower.

—CNBC's Jeff Cox contributed to this article.

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