European Stock Markets and the ECB's Monetary Policy Surprises

Bohl MT, Siklos PL, Sondermann D


Abstract
This paper contributes to the literature measuring the response of stock markets to monetary policy actions. We analyse the reaction of European stock market returns to unexpected interest rate decisions by the European Central Bank (ECB). Endogeneity between interest rate changes and stock returns is taken into account using the identification through the heteroscedasticity approach. Relying on different methods to extract monetary policy shocks, we find a negative and significant relation between unexpected ECB decisions and European stock market performance. Moreover, monetary policy decisions of the ECB are well anticipated by the market, implying that the central bank successfully communicates its monetary policy.



Publication type
Article in Journal

Peer reviewed
Yes

Publication status
Published

Year
2008

Journal
International Finance

Volume
11

Issue
2

Start page
117

End page
130

Pages range
117-130

Language
English

ISSN
1468-2362

DOI