Causal coupling between European and UK markets triggered by announcements of monetary policy decisions

Abstract

We investigate high-frequency reactions in the Eurozone stock market and the UK stock market during the time period surrounding the European Central Bank (ECB) and the Bank of England (BoE)'s interest rate decisions assessing how these two markets react and co-move influencing each other. The dynamic multiscale interaction between these markets and the spillover effect on monetary policy announcement days are quantified by measuring linear and non-linear transfer entropy combined with a Bivariate Empirical Mode Decomposition (BEMD) from a dataset of 1-minute prices for the Euro Stoxx 50 and the FTSE 100 stock indices. We draw the following conclusions. First, central banks' interest rate decisions induce an upsurge in intraday volatility that is more pronounced on ECB announcement days. Second, there is a clear and significant information flow between the markets surrounding the time interest rates are released with prevalent direction going from the market where the announcement is made towards the other. Third, the coupling between the two markets describing the spillover effects is sufficiently well modeled with the linear approach to transfer entropy. %appears to be sufficient in detecting the spillover.