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
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: Suggested Citation