Eurozone Stock Market Reaction to Monetary Policy Interventions and Other Covariates

Nikolaos Petrakis,Christos Floros,Christos Lemonakis,Constantin Zopounidis

doi:10.3390/jrfm15020056

Abstract

The joint effect of the global economic and sovereign debt crisis forced the European Central Bank (ECB) to apply conventional and non-standard expansionary monetary policy interventions in order to stabilize eurozone economies. We conducted a panel regression econometric analysis to study the influence of euro area monetary authority policy interventions, along with two main macroeconomic variables and a sentiment indicator, on market equity returns of eurozone countries for the period January 2007 to December 2017. Our findings suggest that conventional and non-standard monetary policy innovations had a positive lagged impact on equity returns of euro area monetary markets. More specifically, interest rate cuts evenly influenced market indices while non-conventional actions mainly affected core eurozone countries that were less affected by the crisis. We also document a strong negative relationship between inflation rates and market returns. In addition, the sentiment indicator produces positive effects on returns because it contains information that is not incorporated into other macro variables.

Highlights

The financial turmoil and the sharp deterioration of the macroeconomic environment in 2008 caused significant shocks to markets and global economies
We address the research questions (RQs) analyzed within the framework of this study: RQ 1: Do eurozone markets react to European Central Bank (ECB)’s expansionary monetary policy interventions? RQ 2: Do inflation and output affect the returns of eurozone equity markets? RQ 3: What impact does a sentiment indicator have on the performance of eurozone stock markets? RQ 4: Is there a heterogeneous reaction to expansionary monetary policy innovations and to other covariates between core and peripheral eurozone countries?
Beck and Katz (1995) proved that the combination of OLS with panel-corrected standard errors (PCSEs) allows for more accurate estimation compared to GLS in the presence of panel error structures

Summary

Introduction

The financial turmoil and the sharp deterioration of the macroeconomic environment in 2008 caused significant shocks to markets and global economies. At the beginning of the economic crisis, there was great uncertainty about the financial health of globally significant financial institutions (GSIFIs), which led to intense pressure in interbank markets and a possible collapse in financial activity. In 2010, there were market expectations regarding a possible Greek sovereign default, because Greek government bond yields reached unsustainable levels with a risk of “infection” in Spain, Italy, Ireland, and Portugal. The impending sovereign debt crisis forced peripheral eurozone countries to apply for economic adjustment programs in order to receive financial support. Reacting to the global economic and debt crisis, the monetary authority of the euro area implemented both conventional and non-standard monetary policy measures (presented in Section 2) to strengthen lending to the business sector, support financial activity, and support the eurozone countries facing sovereign debt difficulties Ireland and Cyprus, two more peripheral countries, asked for loan packages. Reacting to the global economic and debt crisis, the monetary authority of the euro area implemented both conventional and non-standard monetary policy measures (presented in Section 2) to strengthen lending to the business sector, support financial activity, and support the eurozone countries facing sovereign debt difficulties

Methods

Results

Conclusion