Eurozone Stock Market Reaction to Monetary Policy Interventions and Other Covariates

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.

Monetary Policy Spillovers and Inter-Market Dynamics Perspective of Preferred Habitat Model

“…Additionally, the multivariate DCC-GARCH model effectively identifies cross-market volatility transmissions, thereby advancing our understanding of cryptocurrency dynamics and contributing valuable insights to the financial economics literature through the application of advanced econometric models (Li et al 2021;Liu and Ouyang 2014). Petrakis et al (2022) demonstrate that conventional and unconventional monetary interventions positively impacted equity returns, especially in less affected core eurozone nations. The study found a negative correlation between inflation and market returns, while industrial production positively influenced market gains.…”

The Impact of Interest Rates on the South African Equity Market

“…The interest rate channel denotes that a conventional policy influences the present value of future net cash flows, which affects equity prices (Petrakis et al 2022). Cutting interest rates decreases the risk-free rate, which is used as a discounting factor and so decreases the risk premium of equities, boosting cash flows projected (Petrakis et al 2022).…”

“…The interest rate channel denotes that a conventional policy influences the present value of future net cash flows, which affects equity prices (Petrakis et al 2022). Cutting interest rates decreases the risk-free rate, which is used as a discounting factor and so decreases the risk premium of equities, boosting cash flows projected (Petrakis et al 2022). On the contrary, when interest rates and firms' financing costs rise, investors will reduce their stock and choose other financial assets, resulting in a fall in share prices (Gu et al 2021).…”

“…Announcements by the South African Reserve Bank (SARB) cutting interest rates positively and significantly impact equity market returns, although this impact takes effect two (2) months after the announcement (Petrakis et al 2022). Investors and other agents aim for higher returns, so low-interest rates make riskier securities more attractive (Petrakis et al, 2022).…”

Interplay of multifractal dynamics between shadow policy rates and stock markets

“…The underlying dynamics of unconventional policies as well as most financial markets such as stock markets are significantly complex [ 13 , 37 ]. Considering the Euro area, Petrakis [ 38 ] confirmed that both CMP and UMP have a positive lagged impact on euro equity market returns. The findings showed that market indices are mainly affected by a cut in interest rates.…”