The asymmetric effect of monetary policy on European financial markets

Anita Suurlaht ()

No wp2021-3, Bank of Estonia Working Papers from Bank of Estonia

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

Keywords: Macro policy transmission; nancial markets; economic integration (search for similar items in EconPapers)
JEL-codes: F36 F42 G15 (search for similar items in EconPapers)
Date: 2021-04-08, Revised 2021-04-08
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