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The asymmetric effect of monetary policy on European financial markets

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  • Anita Suurlaht

Abstract

This paper analyses the impact of unanticipated changes in domestic and foreign monetary policy on aggregate stock market performance and risk in ve countries: France, Germany, Italy, Spain and the UK, using an event study methodology. We also study whether the common monetary policy has the same impact in selected EU member states. We relate the e ect of domestic and foreign monetary policy surprises on nancial markets to the prevailing phase of the economic cycle and the state of market sentiment. Our results suggest that during recessions and periods with low sentiment, unanticipated foreign monetary policy contraction is associated with negative stock market returns and increased nancial market risk. We nd that although there is asymmetry within the monetary policy transmission to nancial markets within the EU, domestic monetary policy surprises have little effect on stock returns and stock market risk, particularly during phases of economic expansion and rising sentiment

Suggested Citation

  • Anita Suurlaht, 2021. "The asymmetric effect of monetary policy on European financial markets," Bank of Estonia Working Papers wp2021-3, Bank of Estonia, revised 08 Apr 2021.
    • Handle: RePEc:eea:boewps:wp2021-3
    DOI: 10.23656/25045520/032021/0185
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    Keywords

    Macro policy transmission; nancial markets; economic integration;
    All these keywords.

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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