Market reactions to ECB policy innovations: A cross-country analysis

Abstract

Financial markets vest an important role both in conveying monetary policy innovations to the real economy and in shaping business cycle's fluctuations. Hence, it becomes crucial to assess whether the ECB is able to wield homogeneous reactions in the main Eurozone stock markets and to quell their turbulences. The empirical analysis shows that conventional policy rate shifts affect unevenly the equity indices of the countries analysed, generating asymmetries between their business cycles. Moreover, the ECB stance proved unable to weather the storm and trigger an economic recovery. This calls for a refinement of ECB conduct and justifies the extensive employment of unconventional measures to revive the economy.

Eurozone Stock Market Reaction to Monetary Policy Interventions and Other Covariates

“…Many researchers used the same econometrical approach to study this topic (see among others, Fiordelisi and Ricci 2016;Fiordelisi and Galloppo 2018;Pacicco et al 2019;Fasas et al 2021).…”

“…This study explores the influence of the ECB's expansionary monetary policy on equity returns of eurozone countries using the panel regression econometric method. Several previous studies surveyed the influence of monetary policy mainly on euro area capital markets (see, among others, Fratzscher et al 2014;Haitsma et al 2016;Hau and Lai 2016;Pacicco et al 2019;Chebbi 2019). Considering previous research (Fama and Schwert 1977;Fama 1981Fama , 1990Schwert 1990;Baker and Stein 2004;Stambaugh et al 2011), we also study (along with monetary interventions) whether two main macroeconomic factors, inflation and industrial production, and a sentiment indicator could affect market returns.…”

“…Fausch and Sigonius (2018), focusing on the German market, observed a significant equity response to unexpected policy interventions when the real interest rates were negative. Pacicco et al (2019) applied a joint event study and panel fixed effects regression analysis to explore whether European monetary union (EMU) equity markets reacted to traditional and unconventional ECB policy innovations from April 1999 to June 2016. They concluded that conventional policies heterogeneously affected financial markets, while unconventional measures exerted homogeneous pressure on all markets.…”

Safeguarding Stability and Enhancing Profitability: The Case of Islamic Banking in Indonesia

“…The rise in lending operations can be ascribed to the strong profit-sharing framework inherent in Islamic banking. The significant rise of Islamic banking assets offers a promising new field to study, as most previous studies have focused on different parts of traditional banking systems (Caporale et al, 2018;Pacicco et al, 2019).s…”

COVID-induced sovereign risk in the euro area: When did the ECB stop the spread?

“… 8 Asset purchase and especially bond-buying programs have directly contributed to lowering bond spreads within the euro area, as discussed by Falagiarda and Reitz (2015) , Kilponen et al (2015) , Szczerbowicz (2015) , Eser and Schwaab (2016) , Fratzscher et al (2016) , Gibson et al (2016) , Ghysels et al (2017) , Jäger and Grigoriadis (2017) , De Pooter et al (2018) , Krishnamurthy et al (2018) , and Pacicco et al (2019) . Casiraghi et al (2016) focus on the impact of the ECB’s unconventional monetary policy on Italian government bond yields, Trebesch and Zettelmeyer (2018) emphasize the Greek case, and Lhuissier and Nguyen (2021) uses an external instrument to estimate the impact of ECB’s APP on intra-euro area sovereign spreads.…”