The Relation between Monetary Policy and the Stock Market in Europe

18 Pages Posted: 18 Apr 2018

See all articles by Helmut Lütkepohl

Helmut Lütkepohl

Free University of Berlin (FUB)

Aleksei Netsunajev

Free University of Berlin (FUB)

Date Written: March 2018


We use a cointegrated structural vector autoregressive model to investigate the relation between euro area monetary policy and the stock market. Since there may be an instantaneous causal relation we consider long-run identifying restrictions for the structural shocks and also use (conditional) heteroskedasticity in the residuals for identification purposes. Heteroskedasticity is modelled by a Markov-switching mechanism. We find a plausible identification scheme for stock market and monetary policy shocks which is consistent with the second order moment structure of the variables. The model indicates that contractionary monetary policy shocks lead to a long-lasting down-turn of real stock prices.

Keywords: Cointegrated vector autoregression, heteroskedasticity, Markov-switching model, monetary policy analysis

JEL Classification: C32

Suggested Citation

Lütkepohl, Helmut and Netsunajev, Aleksei, The Relation between Monetary Policy and the Stock Market in Europe (March 2018). DIW Berlin Discussion Paper No. 1729, Available at SSRN: or

Helmut Lütkepohl (Contact Author)

Free University of Berlin (FUB)

Otto Suhr Institut for Political Science\
Ihnestrasse 21

Aleksei Netsunajev

Free University of Berlin (FUB) ( email )

Van't-Hoff-Str. 8
Berlin, Berlin 14195

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