Beating the Average: Equity Premium Variations, Uncertainty, and Liquidity

Batten, Jonathan A.; Kinateder, Harald; Wagner, Niklas

doi:10.1111/abac.12250

Cited by 17 publications

(7 citation statements)

References 68 publications

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“…Few papers study the impact of unconventional policies on stock market risk premia. For example, Batten et al (2022) recently pointed out that during the post-Lehman Brothers crisis, the predictability of the stock premium increased, which was explained by the FED's QE operations. To our knowledge, studies that examine this topic, especially in the European context, are limited.…”

Section: The Stock Market Risk Premium Channelmentioning

confidence: 99%

How is the ECB’s quantitative easing transmitted to the financial markets?

Aloui,

Ben Maatoug

2024

SEF

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Purpose Over the last few years, the European Central Bank (ECB) has adopted unconventional monetary policies. These measures aim to boost economic growth and increase inflation through the bond market. The purpose of this paper is to study the impact of the ECB’s quantitative easing (QE) on the investor’s behavior in the stock market. Design/methodology/approach First, the authors theoretically identify the transmission channels of the QE shocks to the stock market. Then, the authors empirically assess the financial market’s responses to QE shocks in a data-rich environment using a factor augmented VAR (FAVAR). Findings The results show that the ECB’s unconventional monetary policy positively affects the stock market. A QE shock leads to an increase in stock prices and a drop in the realized volatility and the implied risk premium. The authors also suggest that the ECB’s QE is transmitted to the stock market through five main channels: the liquidity, the expectation, the portfolio reallocation, the interest rates and the risk premium channels. Practical implications The findings help to better understand the behavior of stock market assets in a data-rich economic context and guide investors and policymakers in the presence of unconventional monetary tools. For instance, decision-makers and investors should consider the short-term effect of the QE interventions and the changing behavior of the financial actors over time. In addition, high stock market returns can increase risk appetite. This can lead investors to underestimate the market risk. Decision-makers and market participants should take into consideration the impact of the large injection of money through the QE, which may raise the risk of a speculative bubble in the financial market. Originality/value To the best of the authors’ knowledge, this is the first study that incorporates a theoretical and empirical analysis to explore QE transmission to the stock market in the European context. Unlike previous studies, the authors use the shadow rate proposed by Wu and Xia (2017) to quantify the effect of the ECB’s QE in a data-rich environment. The authors also include two key risk indicators – the stock market risk premium and the realized volatility – to capture investors’ behavior in the stock market following QE shocks.

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Section: The Stock Market Risk Premium Channelmentioning

confidence: 99%

How is the ECB’s quantitative easing transmitted to the financial markets?

Aloui,

Ben Maatoug

2024

SEF

View full text Add to dashboard Cite

show abstract

“… Bakry et al, 2022 , Batten et al, 2022a , Batten et al, 2022b , Bouri et al, 2022 , Cheng and Yen, 2020 , Evrim Mandaci and Cagli, 2022 , Jabotinsky and Sarel, 2020 , Jiang et al, 2022 , Kakinaka and Umeno, 2022 , Melki and Nefzi, 2022 , Umar et al, 2021a , Umar et al, 2021b , Wang et al, 2022 .…”

Section: Uncited Referencesmentioning

confidence: 99%

COVID-19 government interventions and cryptocurrency market: Is there any optimum portfolio diversification?

Chowdhury

Abdullah

Masih

2022

Journal of International Financial Markets, Institutions and Mo

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“…The financial system was overloaded with excess liquidity and part of that money flowed into the equity market. Meanwhile, the Eurozone economic growth was contracting, while the equity markets were constantly on the rise [ [8] , [9] , [10] ]. The fragile economies with insufficient international reserves during this period experienced currency crashes.…”

Section: Introductionmentioning

confidence: 99%

Exchange rate instabilities during the Russia-Ukraine war: Evidence from V4 countries

Aliu,

Kučera,

Horák

2024

Heliyon

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Beating the Average: Equity Premium Variations, Uncertainty, and Liquidity

Cited by 17 publications

References 68 publications

How is the ECB’s quantitative easing transmitted to the financial markets?

How is the ECB’s quantitative easing transmitted to the financial markets?

COVID-19 government interventions and cryptocurrency market: Is there any optimum portfolio diversification?

Exchange rate instabilities during the Russia-Ukraine war: Evidence from V4 countries

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