Reassessment of Structural Changes in Financial Markets: The Direct Impact of Central Banks

The evidence of financial globalization and the rapid and uniform contagion that it entails among the different international financial markets, have been exposed after the 2008 crisis outbreak, as well as the different chapters of financial stress that have been experienced since then, such as the sovereign debt crisis, the Brexit event, the COVID-19 pandemic, and the war in Ukraine. Despite these specific episodes, volatility in the post-subprime crisis period has been low in historical terms due, among many other factors, to the monetary policies of central banks which, with their increases in the money supply and low interest rates, have led to a change of substance and form in the financial markets, not only at a national level but also at a supranational level. However, after the COVID-19 pandemic and the outbreak of the war in Ukraine, inflation appeared abruptly putting central banks in an uncomfortable situation, which have been forced to raise interest rates quickly and forcefully. In this paper, an estimation and quantification of the pre-pandemic and post-pandemic volatility thresholds is carried out for each of the main stock market indices to estimate the changes in these borders that affect and determine different degrees of financial contagion. Additionally, this study may determine the potential causal relationship between the change in the balance sheets of the main central banks and market volatility. If such relationships exist, it could undoubtedly mark a before and after in the implementation of monetary policies by these banking entities.