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European Stock Markets and the ECB's Monetary Policy Surprises


  • *The research for this paper was partly conducted while the first two authors were visiting the research centre of the Bank of Finland. We would like to thank the Bank for its hospitability and financial support. Moreover, the first two authors thank the Alexander von Humboldt Foundation for financial support. We are indebted to the participants of the Workshop on Fundamental and Non-Fundamental Asset Price Dynamics (Venastul, organized by the University of Münster, the Norges Bank and the Viessmann European Research Centre), the Conference of the Euro Working Group on Financial Modelling (Lisbon), the International Tor Vergata Conference on Banking and Finance (Rome) and Lieven Baele, Mikael Bask, Patrick Crowley, Andrew Filardo, Iftekhar Hasan, Elena Hesselmann, Esa Jokivuolle, Mikael Juselius, Erik Kole, Kevin Lansing, Paolo Pasquariello, Antti Ripatti, Christian Salm, Dobromit Serwa, Jörg Siemkes, Jouko Vilmunen, Matti Viren, Eugene White, Yangru Wu, the editor and two anonymous referees for their helpful comments and suggestions.

Martin T. Bohl
Department of Economics
Westfälische Wilhelms-University Münster
Am Stadtgraben 9
D-48143 Münster


This paper contributes to the literature measuring the response of stock markets to monetary policy actions. We analyse the reaction of European stock market returns to unexpected interest rate decisions by the European Central Bank (ECB). Endogeneity between interest rate changes and stock returns is taken into account using the identification through the heteroscedasticity approach. Relying on different methods to extract monetary policy shocks, we find a negative and significant relation between unexpected ECB decisions and European stock market performance. Moreover, monetary policy decisions of the ECB are well anticipated by the market, implying that the central bank successfully communicates its monetary policy.