Is the Impact of ECB Monetary Policy on EMU Stock Market Returns asymmetric?

Abstract

This paper investigates whether monetary policy has asymmetric effects on stock returns of the EUM countries at aggregate levels and, for six industry portfolios in France, Italy, Germany, Belgium and Netherlands respectively. In this work, a different measures of monetary policy innovation is adopted. The empirical results, in line with results from previous studies, indicate that for the EUM stock markets there is statistically significant relationship between policy innovations and stock markets returns. This finding is consistent with the hypothesis that positive monetary policy shock (e.g. contractionary policy) is an event that decrease future cash flow. Moreover, the finding from country size and industry portfolios indicate that monetary policy have larger asymmetric effect in industry portfolios of big countries (Italy, France and Germany) compared to the same industry portfolios of small countries (Netherlands and Belgium). However, the sign of the impact is for both groups the same. The policy implications of the analysis can be summarized as follows: if the ECB follows a contractionary monetary policy then the effect on the stock market returns will be lengthier and larger in bear markets. On the other hand, following the same policy, the effect of the ECB actions on the EMU stock markets returns will be smaller in bull markets. The results suggest that monetary policy is not neutral, at least in the short run and, moreover, that there is some role for anticipated ECB monetary policy to affect the stock market but that this role will also have asymmetric impacts on each single EMU country’s stock market.Monetary Policy, Markov-switching, Stock returns.