Monetary Policy and Stock Market Valuation

Bank of Finland Research Discussion Papers, 16, 2020

34 Pages Posted: 7 Nov 2020 Last revised: 1 Dec 2020

Date Written: September 18, 2020

Abstract

This paper estimates the effect of the European Central Banks’s monetary policy on the term structure of expected stock market risk premia. Expected stock market premia are solved using analysts’ dividend forecasts, the Eurostoxx 50 stock index and Eurostoxx 50 dividend futures. Although risk-free rates have decreased after the global financial crisis, the results indicate that the expected average stock market return has remained quite stable at around 9 percent. This implies that the expected average stock market risk premium has increased since the financial crisis. The effect of monetary policy on expected premia is analysed using VAR models and local projection methods. According to the results, monetary policy easing raises the average expected premium. The effect is driven by a rise in long-horizon expected premia.

Keywords: monetary policy, stock market, equity premium

JEL Classification: E52, G12

Suggested Citation

Laine, Olli-Matti, Monetary Policy and Stock Market Valuation (September 18, 2020). Bank of Finland Research Discussion Papers, 16, 2020, Available at SSRN: https://ssrn.com/abstract=3694926 or http://dx.doi.org/10.2139/ssrn.3694926

Olli-Matti Laine (Contact Author)

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

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