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European Stock Markets and the ECB's Monetary Policy Surprises

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  • Martin T. Bohl
  • Pierre L. Siklos
  • David Sondermann

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.

Suggested Citation

  • Martin T. Bohl & Pierre L. Siklos & David Sondermann, 2008. "European Stock Markets and the ECB's Monetary Policy Surprises," International Finance, Wiley Blackwell, vol. 11(2), pages 117-130, August.
    • Handle: RePEc:bla:intfin:v:11:y:2008:i:2:p:117-130
    DOI: 10.1111/j.1468-2362.2008.00219.x
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