Euro area equity risk premia and monetary policy: a longer-term perspective

Daniel Kapp and Kristian Kristiansen

No 2535, Working Paper Series from European Central Bank

Abstract: This study analyses the effects of euro area monetary policy on equity risk premia (ERP). We find that changes in equity prices during periods of accommodative monetary policy mainly reflected adjustments in the discount factor and economic activity – rather than fluctuations in investors’ required risk compensation. Furthermore, the ERP appears to not have declined much since the introduction of unconventional monetary policy and stands higher than prior to the GFC. Use of identified monetary policy shocks points to insignificant effects of monetary policy on the ERP. Further breakdown of these shocks reveals that monetary policy has a significant upwards impact on the ERP if it is perceived as a negative information surprise, while the opposite prevails in the case of a genuine accommodative monetary policy surprise. Accumulating these effects over time suggests that the two might have largely offset each other since the introduction of unconventional monetary policy. JEL Classification: E22, E52, G12

Keywords: equity risk premia; monetary policy shocks; monetary policy transmission (search for similar items in EconPapers)
Date: 2021-04
New Economics Papers: this item is included in nep-cba, nep-eec, nep-fmk, nep-mac and nep-mon
Note: 1884807
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20212535

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