European Monetary Policy Surprises: The Aggregate and Sectoral Stock Market Response

Abstract

In this paper we investigate the stock market response to international monetary policy changes in the UK and Germany. Specifically, we analyse the impact of (un)expected changes in UK and German/Euro area policy rates on UK and German aggregate and sectoral equity returns in an event study. The decomposition of (un)expected changes in policy rates are based on futures markets. Overall, our results suggest that, UK monetary policy surprises have a significant negative influence on both aggregate and industry level returns in both countries. The influence of German/Euro area monetary policy shocks appears insignificant for both Germany and the UK.

Keywords: Monetary policy, stock market, interest rates

JEL Classification: E4, G1