Does the ECB Care about Shifts in Investors’ Risk Appetite?

A key problem facing monetary policy makers is determining whether serious financial instability is present. Periods of financial instability are linked with low investors’ risk appetite (or in other words high risk aversion). Two different measures of investors’ risk aversion are used: (a) the implied volatility from the Eurostoxx 50 index (VSTOX) and (b) an index based on principal component analysis applied to risk premia of several stock portfolios in the eurozone area (12 countries) with different fundamental and size characteristics. By using an unrestricted VAR model and impulse response analysis for the period January 1999 to August 2007, our results show that a shock in the risk aversion indicator affects negatively future real activity in the eurozone in a similar way to an exchange rate shock. The ECB reacts significantly to a risk aversion shock by reducing the interest rate in order to provide liquidity. Moreover, assuming rational expectations and using a forward-looking specification of the Taylor rule, we found that investors’ risk aversion affects the ECB behavior as the leading indicator of future economic activity but not as an independent argument for the monetary policy. It views price stability and economic and financial stability as highly complementary and mutually consistent objectives to be pursued within a unified policy framework.European Central Bank; monetary policy; Taylor rule; transmission mechanism; VAR model; GMM

The informational content of unconventional monetary policy on precious metal markets

This paper investigates the informational content of unconventional monetary policies and its effect on commodity markets, adopting a nonlinear approach for modeling volatility. The main question addressed is how the Bank of England, Bank of Japan, and European Central Bank's (ECB's) announcements concerning monetary easing affect two major commodities: gold and silver. Our empirical evidence based on daily and high-frequency data suggests that relevant information causes ambiguous valuation adjustments as well as stabilization or destabilization effects. Specifically, there is strong evidence that the Japanese Central Bank strengthens the precious metal markets by increasing their returns and by causing stabilization effects, in contrast to the ECB, which has opposite results, mainly due to the heterogeneous expectations of investors within these markets. These asymmetries across central banks' effects on gold and silver risk–return profile imply that the ECB unconventional monetary easing informational content opposes its stated mission, adding uncertainty in precious metals markets

Terrorism and Market Jitters

Terrorist actions can have a multitude of economic consequences that may adversely affect a number of economic indices, sectors and activities including growth and investment. From the markets' perspective, terrorist attacks are unforeseen events that, depending among other things on their magnitude, the number of casualties, the extent of the damages, the targets hit; shake and rattle them. Such incidents can also have a high contagion potential with the shock waves travelling quickly from onemarket to another. Nevertheless, the negative impact on markets from terrorist attacks is, in comparative terms, mild and short-lived

Rogue State Behavior and Markets: The Financial Fallout of North Korean Nuclear Tests

Financial markets react to major political events. The two nuclear tests conducted by North Korea in 2006 and 2009 were a sober confirmation of the nuclear weapon capacity of this state with the concomitant potential security threat this posed for the stability of the greater region. We examine how ten regional stock exchanges and currency markets reacted to this security development and these two specific events. The results, although not uniform across all countries and markets, revealed a greater adverse effect in the case of the second of the two tests. On the whole, the adverse effects on the stock exchanges were short lived

The Effects of Terrorism and War on the Oil and Prices Stock Indices Relationship

This paper, investigates the effect war and terrorism, have on the covariance between oil prices and the indices of four major stock markets - the American S&P500 and the European DAX, CAC40 and FTSE100 - using nonlinear BEKK-GARCH type models. Findings reported herein indicate that the covariance between stock and oil returns is affected by war. A tentative explanation is that the two wars examined here, predispose investors and market agents for more profound and longer lasting effects. On the other hand, in the case of terrorist incidents that, vis-à-vis war, are of a more transitory nature and one-off security shocks, only the co-movement between CAC40, DAX and oil returns is affected. No significant impact for the same terrorist events is observed in the relationship between the S&P500, FTSE100 and oil returns. This difference in the reaction may tentatively be interpreted as indicating that the latter markets are more efficient in absorbing the impact of terrorist attacks.war, terrorism, crude oil, stock market returns, co-movement

Has Stock Markets' Reaction to Terrorist Attacks Changed throughout Time?: Comparative Evidence from a Large and a Small Capitalisation Market

An expanding body of literature has addressed the question of the economic impact terrorist attacks have. A part of this literature has focused on the impact recent major terrorist hits had on financial markets. The question addressed by this paper is to what extent markets' reaction to major terrorist hits has changed over time. A large - the London stock exchange - and a small - the Athens stock exchange - capitalization market are used as the vehicles for the empirical investigation. Results from event study methodology as well as from conditional volatility models used here do no seem to point to any clear and unequivocal picture. Both markets appear to react selectively to terrorist events with no evidence of a noticeable change through time. Generally the effects appear to be transitory in both markets and seem to depend on the political and symbolic significance of the target hit. Market size and maturity also seem to influence the degree of the effects.terrorism, financial markets, volatility, event study

Terrorism Induced Cross-Market Transmission of Shocks: A Case Study Using Intraday Data

Terrorist incidents exert a negative, albeit generally short-lived, impact on markets and equity returns. Given the integration of global financial markets, mega-terrorist events also have a high contagion potential with their shock waves being transmitted across countries and markets. This paper investigates the cross-market transmission of the London Stock Exchange's reaction to the terrorist attacks of 2005. It focuses on how this reaction was transmitted to two other major European stock exchanges: Frankfurt and Paris. To this effect, high frequency data are used and multivariate GARCH models are employed. Findings reported herein indicate that the volatility of stock market returns is increased in all three cases

The Effects of Terrorism and War on the Oil and Prices Stock Indices Relationship

This paper, investigates the effect war and terrorism, have on the covariance between oil prices and the indices of four major stock markets - the American S&P500 and the European DAX, CAC40 and FTSE100 - using nonlinear BEKK-GARCH type models. Findings reported herein indicate that the covariance between stock and oil returns is affected by war. A tentative explanation is that the two wars examined here, predispose investors and market agents for more profound and longer lasting effects. On the other hand, in the case of terrorist incidents that, vis-\ue0-vis war, are of a more transitory nature and one-off security shocks, only the co-movement between CAC40, DAX and oil returns is affected. No significant impact for the same terrorist events is observed in the relationship between the S&P500, FTSE100 and oil returns. This difference in the reaction may tentatively be interpreted as indicating that the latter markets are more efficient in absorbing the impact of terrorist attacks

Does the ECB Care about Shifts in Investors’ Risk Appetite?

A key problem facing monetary policy makers is determining whether serious financial instability is present. Periods of financial instability are linked with low investors’ risk appetite (or in other words high risk aversion). Two different measures of investors’ risk aversion are used: (a) the implied volatility from the Eurostoxx 50 index (VSTOX) and (b) an index based on principal component analysis applied to risk premia of several stock portfolios in the eurozone area (12 countries) with different fundamental and size characteristics. By using an unrestricted VAR model and impulse response analysis for the period January 1999 to August 2007, our results show that a shock in the risk aversion indicator affects negatively future real activity in the eurozone in a similar way to an exchange rate shock. The ECB reacts significantly to a risk aversion shock by reducing the interest rate in order to provide liquidity. Moreover, assuming rational expectations and using a forward-looking specification of the Taylor rule, we found that investors’ risk aversion affects the ECB behavior as the leading indicator of future economic activity but not as an independent argument for the monetary policy. It views price stability and economic and financial stability as highly complementary and mutually consistent objectives to be pursued within a unified policy framework

Has Stock Markets' Reaction to Terrorist Attacks Changed throughout Time? Comparative Evidence from a Large and a Small Capitalisation Market

An expanding body of literature has addressed the question of the economic impact terrorist attacks have. A part of this literature has focused on the impact recent major terrorist hits had on financial markets. The question addressed by this paper is to what extent markets' reaction to major terrorist hits has changed over time. A large - the London stock exchange - and a small - the Athens stock exchange - capitalization market are used as the vehicles for the empirical investigation. Results from event study methodology as well as from conditional volatility models used here do no seem to point to any clear and unequivocal picture. Both markets appear to react selectively to terrorist events with no evidence of a noticeable change through time. Generally the effects appear to be transitory in both markets and seem to depend on the political and symbolic significance of the target hit. Market size and maturity also seem to influence the degree of the effects