European Stock Markets and the ECB's Monetary Policy Surprises
Posted: 7 May 2008
This paper contributes to the literature measuring the response of stock markets to monetary policy actions. We analyze the reaction of European stock market returns to unexpected interest rate decisions by the ECB. Endogeneity between interest rate changes and stock returns is taken into account using the identification through heteroskedasticity approach. Relying on different methods to extract monetary policy shocks, we find a negative and significant relation between unexpected ECB decisions and European stock markets performance. Moreover, monetary policy decisions of the ECB are well anticipated by the market implying that the central bank successfully communicates its monetary policy.
Keywords: Monetary Policy Shocks, European Stock Market, Identification through Heteroskedasticity, Principal Components Analysis
JEL Classification: G12, G15, E44, E47, E52
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