Market Reactions to European Commission Policy Announcements A Model Intervention Analysis

This study investigates the impact of specific policy announcements made by the European Commission (EC) on European Union Member States’ sovereign yield spreads, specifically those related to the Excessive Deficit Procedure (EDP), Adjustment Programmes linked to financial assistance, and Post Programme Surveillance (PPS). We employ an original time series intervention analysis based on an Autoregressive Distributed Lag (ARDL) model. While time series intervention analysis is frequently used in various fields, this study is the first attempt to utilise this approach to estimate the impact of a policy announcement on financial markets. Furthermore, the innovative application of the ARDL model in this context allows us to identify the dynamic effects of policy announcements over time, capturing both short-term and long-term relationships between yield spreads and their key macroeconomic and financial determinants. Thus, the policy announcement effect is determined by carefully comparing the behaviour of the dependent variable prior to and following the intervention. We consider various specifications of the intervention variable and its associated transfer function. Our findings reveal that EDP implementation or abrogation exerts a significant, albeit moderate, reduction in EU Member States’ sovereign spreads. PPS announcements appear to have a negligible impact. In contrast, adjustment programmes-related announcements substantially reduce the yields, not only in the country under consideration but also across other European sovereign bond markets. This may show that EC announcements, especially those pertaining to adjustment programmes, surprise financial market participants and contribute to a decrease in yield spreads, whereas PPS and EDP announcements are largely already priced in by financial market participants.