European Monetary Policy Surprises: The Aggregate and Sectoral Stock Market Response

Abstract

In this paper we investigate the stock market response to international monetary policy changes in the UK and Germany. Specifically, we analyse the impact of (un)expected changes in UK and German/euro area policy rates on UK and German aggregate and sectoral stock returns in an event study. The decomposition of the (un)expected changes in policy rates are based on futures markets. Overall, our results suggest that, UK monetary policy surprises have a significant negative influence on both aggregate and industry level stock returns in both the UK and Germany. The influence of German/Euro area monetary policy shocks appears insignificant for both countries.

Monetary policy announcements and stock reactions: An international comparison

“…There is good evidence that monetary policy responses to asset prices are themselves asymmetric (Mayes & Viren, 2011 for the euro area; D'Agostino, Sala, & Surico, 2005 for the US) but little in the reverse direction, although Anderson, Bollerslev, Diebold, and Vega (2007) find that stock price responses to positive macroeconomic news, including that from interest rates, is positive in expansions and negative in contractions. 1 Simply put, it is normally thought, on the basis of previous evidence (Bernanke & Kuttner, 2005;Bredin, Hyde, Nitzsche, & O'Reilly, 2007a;Bredin, Hyde, Nitzsche, & O'Reilly, 2007b;Honda & Kuroki, 2006;Wongswan, 2005), that if there is a positive interest rate surprise this will encourage markets to fear that there is more adverse information available to the central bank than they had thought existed and hence the stock price response would be negative. However, in uncertain times such a surprise might lead markets to believe that policy will be more conducive to steady growth in the future, as the central bank appears more determined to maintain price stability than was previously thought.…”

The Short-Run Effect of Monetary Policy Shocks on Credit Risk: An Analysis of the Euro Area

“…Intra-daily data is unavailable to us, so we use the change in end-of-day closing prices surrounding ECB Governing Council decisions. In contrast to Federal funds futures, we do not require a scale factor for the Euribor futures to account for the days remaining in the month after a policy action (Bredin et al, 2009;Brand, Buncic, and Turunen, 2010). However, we account for illiquidity toward the maturity of the futures contracts and use the second closest-to-delivery contract instead of the current series whenever there are less than 5 days between the policy event and the next final settlement day.…”

“…We follow the standard event study approach to identify the surprise component of ECB monetary policy announcements (see Bredin, Hyde, Nitzsche, and O'reilly, 2009;León and Sebestyén, 2012; Haitsma, Unalmis, and de Haan, 2016, among others). Different from the US, for which federal fund futures rates are available, there are no futures market instruments that track the Euro Area policy rate.…”

What does unconventional monetary policy do to stock markets in the euro area?

“…For instance, Bredin, Hyde, Nitzsche, and Reilly (2009) investigate via an event study the stock market response to unexpected changes in the U.K. and euro area monetary policy rates. The results are mixed.…”