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Examining spillover effect of US monetary policy to European stock markets: A Markov-Switching approach

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  • Muhammad Zubair Mumtaz
  • Zachary Alexander Smith

Abstract

This study empirically examines the spillover effect from US monetary policy to nineteen European economies using Markov-switching models. The results of the univariate Markov-switching models validate the presence of two distinct regimes for both US monetary policy and the stock markets. We find mixed results when applying the multivariate Markov-switching models. The results report a positive relationship between the US interest rate and developed stock markets except for the Finish, Swiss, Swedish and UK stock markets whereas our findings confirm a positive relationship with the developing stock markets except for the Slovenian and Ukraine stock markets. Importantly, the nature of this effect varies during the economic crisis period. This study also compares the spillover effect between Asian and European stock markets and concludes that the effect of US monetary policy varies from market to market, however, changes in US monetary policy have greater effects on developed markets.

Suggested Citation

  • Muhammad Zubair Mumtaz & Zachary Alexander Smith, 2019. "Examining spillover effect of US monetary policy to European stock markets: A Markov-Switching approach," Estudios de Economia, University of Chile, Department of Economics, vol. 46(1), pages 89-124, June.
    • Handle: RePEc:udc:esteco:v:46:y:2019:i:1:p:89-124
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    File URL: https://estudiosdeeconomia.uchile.cl/index.php/EDE/article/view/52636/55230
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    More about this item

    Keywords

    Spillover effect; monetary policy; Markov-switching models; European stock markets;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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