European Stock Markets and the ECB's Monetary Policy Surprises

Posted: 7 May 2008

See all articles by Martin T. Bohl

Martin T. Bohl

University of Muenster

Pierre L. Siklos

Wilfrid Laurier University - School of Business & Economics; Balsillie school of international affairs

David Sondermann

European Central Bank (ECB)

Abstract

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

Suggested Citation

Bohl, Martin T. and Siklos, Pierre L. and Sondermann, David, European Stock Markets and the ECB's Monetary Policy Surprises. International Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1130129

Martin T. Bohl

University of Muenster ( email )

Schlossplatz 2
D-48149 Muenster, D-48149
Germany

Pierre L. Siklos

Wilfrid Laurier University - School of Business & Economics ( email )

Department of Economics
75 University Avenue W.
Waterloo, Ontario N2L 3C5
Canada
519-884-0710 Ext.. 3491 (Phone)

HOME PAGE: http://pierrelsiklos.com

Balsillie school of international affairs ( email )

67 Erb Street West
Waterloo, ON N2L 6C2
Canada

David Sondermann (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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