Electronic copy available at: http://ssrn.com/abstract=1833622

1

Eurozone Stock Market Reactions

to Unexpected ECB Monetary Policy Announcements

Jean-Yves Filbien1

Fabien Labondance2

Abstract:

To examine the Eurozone stock market reactions to European Central Bank (ECB)

monetary policy announcement surprises, we study the effect of unexpected changes in the

ECB's main refinancing rate on aggregate and sectoral Eurozone equity returns. We also

analyse the results according to varying business conditions. We estimate unexpected

changes on the basis of the market's expectations released in the financial press just before

the monetary policy announcement. Using an event study methodology for the 1999-2008

period, we find that the impact of ECB monetary policy surprise is not significant for Euro-

zone stock markets. However, we find a significant stock market reaction around

unexpected ECB monetary policy announcements when we account for business conditions

and industry effects.

JEL Classification: E52, E58, G14

Keys Words: Monetary Policy, Stock Prices, Event Study, ECB

1 Jean-Yves Filbien, Louvain School of Management and FUCaM - Univ. Lille Nord de France - LSMRC, email: jean yves.filbien@fucam.ac.be, 151 chaussée de Binche 7000 - Mons (Belgium) 2 Fabien Labondance (corresponding author), Louvain School of Management and FUCaM - Université Grenoble II, email: fabien.labondance@fucam.ac.be We appreciate discussions with the participants of the 2009 Research Network Macroeconomics and Macroeconomic Policies Conference in Berlin; the 2009 Symposium on Money, Banking and Finance in Orléans; and the 2009 New Challenges to Central Banking in the Global Financial System Conference in Namur. We thank Natacha Gilson and Etienne Farvaque for many helpful comments. Remaining errors are ours.

Electronic copy available at: http://ssrn.com/abstract=1833622

2

1 Introduction

In the Eurozone, maintaining price stability is the primary objective of the European Central

Bank (ECB), though question of whether it should react to asset prices remains a topic of

much debate. Yet this debate requires an accurate answer to a prerequisite question first:

Does the ECB affect asset prices? An accurate understanding of the relationship between

monetary policy and asset prices is important for analysing the ECB's monetary policy

appropriately.

We therefore empirically study the impact of unexpected ECB monetary policy

announcement during 1999-2008 to estimate stock market reactions to monetary policy

announcements and to examine the determinants of that impact. We consider an event

period starting with the ECB creation until the recent financial crisis. In particular, we

analyze how both aggregate and domestic Eurozone stock markets respond to monetary

policy surprises. We then decompose our results according to business conditions and

industry settings.

Although we recognize that monetary policy surprises occur not only during central bank

meeting but also in speeches given by members of central banks, these events are

heterogeneous and generally wider in focus. Moreover, the ECB's communication on the

monetary analysis does not play a major determinant of its actions, especially in ECB interest

rate decisions (Berger et al., 2011). Thus, we concentrate on stock market reactions

surrounding ECB monetary policy decisions and accordingly define a monetary policy

announcement as the release of the main refinancing operations rate (MRO) by the

Governing Council of ECB. We focus on these reactions because the MRO is the main

instrument under control of Eurozone monetary policy makers. Furthermore, we distinguish

expected and unexpected components of monetary policy announcements (Bernanke and

Kuttner, 2005; Gurkaynak et al., 2005; Wongswan, 2009). That is, according to the semi-

strong efficiency hypothesis, stock prices reflect all publicly available information. Thus, the

surprise of a monetary policy announcement conveys information to stock markets (Pearce

and Roley, 1983). Prior literature indicates a negative and significant relation between

unexpected monetary policy decisions and stock market performance (Bernanke and

Kuttner, 2005). We estimate this unexpected component on the basis of the difference

Electronic copy available at: http://ssrn.com/abstract=1833622

3

between the ECB monetary policy decision and the market's expectations, as released in the

financial press just before the ECB monetary policy announcements.

This study thus extends existing literature across several dimensions. First, we provide a

new estimation of the unexpected monetary decisions component in a market's

expectations, based on the reports in the financial press prior the monetary policy

announcement. Second, we assess the impact of ECB monetary policy on stock returns,

considering as well the aggregate and domestic stock markets that re°ect business

conditions and industry settings. Third, though extensive research has investigated the

impact of U.S. monetary policy on U.S. asset prices (Cook and Hahn, 1989; McQueen and

Roley, 1993; Jensen and Johnson, 1995; Patelis, 1997; Kuttner, 2001; Bom¯m, 2003;

Bernanke and Kuttner, 2005; Rigobon and Sack, 2004; Gurkaynak et al., 2005), to the best of

our knowledge, few studies investigate how Eurozone stock markets react to ECB monetary

policy decision surprises. We therefore focus specifically on Euro-zone stock markets.

Fourth, we use a sample period that is much longer than those in previous studies.

With these contributions, we derive several key results. First, we observe that the

ECB's monetary policy decisions are often predictable and homogenous during the period as

Diouf and Pépin (2010) also demonstrated it. Second, using an event study methodology, we

find unexpected changes in ECB monetary policy that affect both aggregate and domestic

Eurozone stock markets, mainly on the announcement date.

Our results suggest that Eurozone stock markets do not react at ECB surprises over the

three-day announcement period. Thus, the incorporation of changes in the ECB's

MRO into Eurozone stock prices is quick. Third, we find no evidence of an inverse

relationship between the abnormal returns of Eurozone stock indexes and MRO around an

unexpected ECB monetary policy announcement. Fourth, when we decompose the stock

market reaction according to business conditions, the results suggest that the influence of an

unexpected ECB monetary policy is negative in bad times and positive in good times. Fifth,

the unanticipated changes in the ECB main refinancing operations rates announcements have

abnormal effects only for some sectorial stock indexes.

The rest of this article is organized as follows: In Section 2, we review the previous literature

and construct our testable hypotheses. In Section 3, we describe our data and present the

methodology. In Section 4, we discuss the empirical results. Finally, we summarize our main

4

conclusions in Section 5.

2 Literature and Hypotheses

According to the rich literature on monetary policy transmission, a change of the target rate

affects the real economy (Bernanke and Blinder, 1992), through interest and wealth

channels. Thus, the most direct and immediate impact of monetary policy decisions is the

financial markets (Bernanke and Kuttner, 2005). We review the most important empirical

studies related to the impact of monetary policy on the stock markets to formulate our

hypotheses for empirical testing.

Many researchers empirically address the question of the impact of monetary policy

announcements on stock prices. Studies typically find an inverse relationship between stock

prices and the target rate determined by central banks. For the 1977-1982 period, Pearce

and Roley (1983) investigate the U.S. stock market response to weekly monetary

announcements. They find that an unexpected increase in the announced money supply

lowers stock prices, whereas an unexpected decrease reduces stock prices. For the period

from September 1977 to October 1982, Pearce and Roley (1985) examine the daily reaction

of U.S. stock prices to announcements about a broad set of macroeconomics news. Their

result again suggests that stock prices affect unexpected monetary policy news. From January

1967 to December 1990, Thorbecke (1997) observes that an expansionary U.S. monetary

policy increases ex-post U.S. stock returns by increasing expected cash °ows or decreasing

the discount factors. From June 1989 to December 2002 period, Bernanke and Kuttner

(2005) reveal that on average, a hypothetical, unanticipated 25-basis point decrease in the

Federal funds rate target would be associated with an approximately 1% increase in U.S.

stock indexes. Bomfim (2003) indicates that for each basis point increase in the expected

average daily values of the funds rate in the following month, daily stock market returns fall

by 0.04 percentage points. Over a January 1994-November 2001 period, Rigobon and Sack

(2004) find that an unanticipated 25-basis point increase in the U.S. short-term interest rate

results in a 1.7% decline in the S&P index. Using intraday data during 1990-2004, Gurkaynak

et al. (2005) find that, on average, a surprise 25-basis point tightening in the Federal funds

rate leads to an approximately 1% significant fall in the S&P500. In the Eurozone, the results

are more mixed though. Angeloni and Ehrmann (2003) analyse the effects of ECB monetary

5

surprises on domestic stock market indexes in Eurozone and discover that the impact of a

monetary tightening is negative in all countries studied except Ireland. Bohl et al. (2008)

assess the Eurozone stock market reactions to unexpected interest rate decisions by ECB

and also find a negative and significant relationship between ECB monetary policy surprises

and European stock market returns. However, Bredin et al. (2009) indicate that unexpected

changes in German/Euro monetary policy have no impact on aggregate German stock

market returns. Thus, from this literature, we formulate the following hypothesis:

Hypothesis 1: We expect an inverse relationship between the ECB MRO and Eurozone stock

markets returns around the monetary policy announcements.

Previous studies also assume that investor reactions are similar across various economic

states. However, we expect that the investor's behavior changes with business conditions.

Analysing the daily changes in the S&P500 index over September 1977-May 1988, McQueen

and Roley (1993) find that the S&P 500 index does not respond to certain economic

information. Their results also are conditional on the business state, such that when the

economy is strong, the stock market reacts negatively to news about higher real economic

activity. McQueen and Roley explain this result according to the larger increase in the

discount rates relative to expected cash flows. Moreover, Veronesi (1999) shows that the

stock markets overreact to bad news in good times and underreact to good news in bad

times. When business conditions are strong, a bad news increases the discount over

expected cash flows, which reflects an attempt to bear the risk of higher uncertainty. Good

news in bad times also tends to increase expected cash °ows, but it also increases the

discount investors demand to hold the asset. Funke and Matsuda (2006) thus analyze the

impact of a broad set of macroeconomic news announcements on stock prices according to

the conditions of economy. They find that the impact of the Fed target rates varies according

to business cycles. When the economy is growing, a higher-than-expected Federal funds rate

tends to lower stock prices. Higher interest rates also may have a direct impact on stock

prices by reducing the value of discounted future earnings. When the economy is in

recession though, an unexpected increase in the Federal funds rate tends to lead a rise in

stock prices. Higher-than-expected interest rates may imply a better assessment by

monetary authorities of the future outlook of the economy and thus, could induce

expectations of greater growth. Recently, Jansen and Tsai (2010) observe that a surprise

monetary policy affects larger the stock returns in a bear market than in a bull market. To

6

our knowledge, no studies consider the European stock market reactions according to

business conditions. We thus separate the impact of the ECB monetary policy according to

business conditions:

Hypothesis 2.a: Unexpected surprises in ECB monetary policy announcements have a positive

impact on aggregate Eurozone stock markets returns during good times.

Hypothesis 2.b: Unexpected surprises in ECB monetary policy announcements have a negative

impact on aggregate Eurozone stock markets returns during bad times.

Most of these studies clearly focus on aggregate equity markets. That is, prior literature

mostly neglects disaggregate levels, which could lead to asymmetric effects of monetary

policies across industries. According to Krugman and Venables (1996), the integration of an

economy promotes specialization patterns. Furthermore, we argue that a monetary policy

shock could affect some industries. Carlino and Defina (1998) study the effects of monetary

policy shocks across regions in the United-States. They find different responses, especially in

manufacturing-intensive states. In Europe, Carlino and Defina (2000) find that

heterogeneities among Eurozone countries relate significantly to their sectoral structures. In

Germany, Hayo and Uhlenbrock (2000) show that German LÄander are asymmetrically

influenced by monetary shocks because of the many large differences in their regional

industry portfolios. Bredin et al. (2009) moreover find that unexpected U.K. monetary

policies have a significant negative impact on U.K. industry-level returns. However, these

latter authors do not observe a significant influence of German/Eurozone monetary policy

surprises on sectoral German indexes. Taking into account the characteristics in European

economies, we anticipate:

Hypothesis 3: The effect of the ECB's main refinancing operations rate announcements varies

across industry.

3 Data and Methodology

To test our hypothesis, we employ an event study. Therefore we begin by describing our

data, then present our methodology.

3.1 Data

3.1.1 Sample

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We collect all ECB announcements about the MRO during the ECB Council of Governors

meetings from January 1, 1999, to December 31, 2008, using the event dates listed on the

ECB website. Our sample covers 157 events. As Table 1 reveals with regard to the

frequency of ECB monetary policy announcements, we observe 16 increases and 11

decreases in the MRO.

3.1.2 Measuring Unexpected Monetary Policy Announcements

We define the unexpected component of MRO announcements according to the difference

between European ECB watchers consensus, released in the financial press just before the

ECB Board of Governors' meetings, and the decisions of the ECB (Pearce and Roley, 1983,

1985; Bohl et al., 2008; Gkougkousi and Rossenboom, 2010). We obtain European analysts'

expectations from research published in Financial Times,

Table 1 : Distribution of the Change in ECB Main Refinancing Operations rates

Announcements

This table presents the annual frequency of the change in ECB main refinancing operations rates

announcements between 1999 and 2008

Les Echos, and the La Tribune, using Factiva3. Our estimate of unexpected ECB monetary

announcement includes the sign of the surprise and its degree. The sign of the unexpected

ECB MRO reflects the difference between the sign of the change in the ECB MRO and that

expected by the analysts. The degree of unexpected ECB MRO instead indicates the

3 Factiva is a database providing a world-wide press content.

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difference between the degree of the change in the ECB MRO and that expected by analysts.

For example, on April 4, 1999, the ECB lowered the MRO from 3.00% to 2.50%, whereas

the market expected a decrease of 25 basis points. We therefore identify an unexpected

ECB monetary policy announcement in degree but not in sign.

In Tables 2 and 3, we provide the occurrence matrix of the sign and the degree of

unexpected changes in ECB MRO. We have 17 and 11 unexpected ECB monetary policy

announcements according to the sign and the degree, respectively. Therefore, it appears that

the ECB monetary policy decisions are well anticipated by analysts. In Table 4, we also

present the distribution of the sign and the degree of unexpected ECB MRO over the study

period. We argue that these data imply the ECB has successfully communicated its monetary

policy, especially in the recent years (Rosa and Verga, 2007).

Table 2 : Sign of Unexpected Changes in ECB Main Refinancing Operations

Rates Announcements Matrix

This table presents the frequency of unexpected signs of the ECB main refinancing operations rates

announcements. We present the expected sign of the change in the ECB main refinancing operation rates just

prior to the monetary policy announcement in the columns and the sign of the change in the ECB main

refinancing operation rates in the rows.

9

Table 3 : Degree of Unexpected Changes in ECB Main Refinancing Operations

Rates Announcements Matrix

This table presents the frequency of the unexpected degree of the ECB main refinancing operations rates

announcements. We present the expected degree of the change in the ECB main refinancing operation rates

just prior to the monetary policy announcement in the columns and the degree of the change in the ECB main

refinancing operation rates in the rows.

Table 4 : Distribution of Unexpected Changes in ECB Main Refinancing

Operations Rates Announcements

This table presents the annual frequency of the unexpected sign and the degree of the changes in the ECB main

refinancing operations rates announcements.

3.2 Methodology

3.2.1 Stock Prices Indexes

We focus on stock markets because they are among the most liquid asset markets in the

Eurozone. We use daily stock market index prices from Datastream. We study the

Eurozone stock markets with the highest capitalizations, seven domestic stock market

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indexes: the BEL20 Index (Belgium), the OMX Helsinki Index (Finland), the CAC40 Index

(France), the Performance DAX30 Index (Germany), the Milan MIB30

Index (Italy), the AEX Index (The Netherlands), and the IBEX35 Index (Spain); and one

aggregate stock market index, the DJEurostoxx50 Index (Eurozone). We provide descriptive

statistics to better understand the financial environment in which take place the ECB

monetary policy. In Table 5, we present the performance data from 1999 to 2008. Each year,

on average, performance ranges from -4.64% for Italy and 4.58% for Finland, to 0.64% for

France and 1.13% for Germany. From Datastream, we also extract the sectorial

DJEurostoxx index prices.

3.2.2 Event Study Methodology

We calculate the abnormal returns using from the event study methodology introduced by

Fama et al. (1969). Abnormal returns can be estimated with three different models: the

constant mean returns model, the market model, or the adjusted return risk market. The

measure of abnormal returns is robust to the choice of model (Brown and Warner, 1985).

Because of our focus on index returns, we select the mean constant returns model to

estimate the abnormal component of returns of stock market index i at date t:

(1)

with

(2)

where is the abnormal return of the stock market index i at day t, reveals the

observed return of the stock market index i at day t, and indicates the average of returns

of index i over the estimation period. To avoid contamination of the estimation period, we

use an estimation period that spans 400 days to 20 days before the announcement date4. We

calculate the cross-sectional average abnormal return:

4 Our results are robust to the length of the estimation period.

11

(3)

Table 5 : Performance of the Eurozone Stock Markets

This table presents the annual percentage returns of the Eurozone stock markets between January 1, 1999, and

December 31, 2008. The average return over the 1999-2008 period is calculated from the geometrical average.

The domestic and aggregate Eurozone stock markets are the BEL20 Index (Belgium), the DJEurostoxx50 Index (Eurozone), the OMX Helsinki Index (Finland), the CAC40 Index (France),

the Performance DAX30 Index (Germany), the Milan MIB30 Index (Italy), the AEX Index (The Netherlands),

and the IBEX35 Index (Spain).

where n indicates the number of announcements in our sample. Then, we calculate the

cumulative abnormal returns by summing the average abnormal returns over the three

trading days surrounding the announcement dates [-1 day; +1 day]:

(4)

This window of three trading days controls for possible news leaks, allows investors time to

gather additional information, and avoids overlapping events. To test for statistical

significance, we control for event-induced variance (Boehmer et al., 1991).

3.2.3 Classification of Business Conditions

Following McQueen and Roley (1993), we use the seasonally adjusted monthly industrial

production index of each country to define their business conditions. First, we estimate a

trend in the log of industrial production on a constant and a time trend from January 1,

1999, to December 31, 2008. Second, we add and subtract a constant from the trend,

creating upper and lower bounds. We choose the constant for each index such that the log

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of industrial production is greater than upper bound, denoted as\high" business activity, 25%

of the time. The log of industrial production is less than the lower bound, indicating \low"

economic activity, about 25% of the time as well. \Medium" economic activity is represented

by the remaining observations between the bounds.

4 Results

We develop the results following the three hypotheses previously mentioned.

4.1 Stock Market Reaction to Unexpected ECB Monetary Policy

Table 6 presents the correlation coeffcients between the returns of the aggregate and

domestic Eurozone stock markets, the ECB MRO, and the European short interest rates.

Not surprisingly, we observe that the aggregate and domestic Eurozone stock market

returns are significatively and strongly correlated. The Eurozone returns index is highly

correlated with the German and French stock markets returns in particular. Moreover, the

European short interest rates and the ECB MRO are significantly and strongly correlated.

Finally, we observe a significant negative correlation between the ECB MRO and the

domestic Eurozone stock markets returns.

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Table 6 : Correlation Matrix

This table presents the correlation coefficients of the returns of the BEL20 Index (Belgium), the DJEurostoxx50 Index (Eurozone), the OMX Helsinki Index (Finland), the

CAC40 Index (France), the Performance DAX30 Index (Germany), the Milan MIB30 Index (Italy), the AEX Index (The Netherlands), and the IBEX35 Index (Spain), as well

as the ECB main refinancing operations rates (MRO) and Euribor 3 months. (***),(**), and (*) indicate the significant results at the 1%, 5% and 10% levels, respectively.

14

In Table 7, we present the cumulative abnormal returns according to the sign and the degree

of the unexpected change in the ECB MRO. We expected a negative relationship between

abnormal returns and the sign / degree of the change in the ECB MRO, but our results do

not indicate any evidence of an inverse relationship between the abnormal returns and

unexpected ECB monetary policy decisions. Thus, we reject hypothesis 1. One day before

the announcement date, we observe negative abnormal returns for Finland from a decrease

and positive abnormal returns for Belgium for the status quo. One day after the

announcement date, we observe negative returns for the German, Italian, and Spanish stock

market indexes from an unexpected decrease in the change in the ECB MRO. Moreover,

except for France, we do not ¯nd significant cumulative abnormal returns over the event

period (-1 day, +1 day). We observe abnormal returns for the Eurozone stock market

indexes (with the exceptions of Belgium and Finland) at the announcement date, which

mainly occur in response to the status quo and drive wealth destruction for shareholders

unless the status quo stands. At the announcement date, we also discover that we have an

unexpected increase in ECB monetary policy that are positive abnormal returns. These

results suggest that the incorporation of the ECB monetary policy announcement is quick.

They also are consistent with research into the speed of convergence toward efficiency

around macroeconomic news (Pearce and Roley, 1983; Ederington and Lee, 1995).

Accordingly, we focus hereafter on the announcement day for our analyses.

4.2 Stock Market Reaction to Unexpected ECB Monetary Policy According to

Business Conditions

From Figure 1, we observe that the moving correlation between the Euribor and the

DJEurostoxx50 index is not stationary over time. Over the study period, we observe three

cycles with positive moving correlations (from January 2000 to May 2001; from August 2001

to December 2003; and from September 2005 to March 2008). The rest of the analysis

period corresponds to negative correlations. Therefore, the decisions of the ECB do not

always have pro-cyclical effects on the Eurozone stock market. We split our analysis

according to three business conditions defined by McQueen and Roley (1993): low, medium,

and high.

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Table 7 : Abnormal Returns for the Eurozone Stock Markets

This table presents the cumulative abnormal returns for the BEL20 Index (Belgium), the DJEurostoxx50 Index

(Eurozone), the OMX Helsinki Index (Finland), the CAC40 Index (France), the Performance DAX30 Index

(Germany), the Milan MIB30 Index (Italy), the AEX Index (The Netherlands), and the IBEX35 Index (Spain). The

abnormal returns are estimated from the constant mean returns model. Event 0 corresponds to the

announcement date. Statistical significance is based on Boehmer et al. (1991) and is denoted (***),(**), and (*)

for 1%, 5%, and 10% respectively.

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Figure 1 : Moving Correlation Between DJEurostoxx50 and Euribor Correlation using a 360 days Rolling Window

In Table 8, we present the abnormal returns at the announcement date according to

business conditions. We observe different stock market reactions according these economic

states. Moreover, our results suggest that the stock market reacts more when the

unexpected change in the ECB MRO is downward. We find positive abnormal returns to

unexpected decreases in the ECB MRO for four domestic Eurozone stock markets in good

economic conditions. For example, in the German stock market, shareholders gained 1.82%.

An unexpected decrease in the ECB MRO thus corresponds to a good news for investors

when the economy is strong. A strong market's perception of the unexpected decrease in

the ECB MRO in good times is similar to that a median of economy. We find significant

abnormal returns of 2.35% for the aggregate Spanish stock market. Thus, we valid hypothesis

2.a. However, in contrast with the results for strong and median business conditions, we

observe large negative abnormal returns to unexpected decrease in the ECB MRO during

bad times, confirming hypothesis 2.b. This finding suggests that investors overreact to an

unexpected decrease in bad times, especially if the ECB decreases the MRO. For example,

we observe negative abnormal returns of 5.84% for the French stock market index.

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Table 8 : Abnormal Returns of Main Euro Stock Markets According Economic

States at the Announcement Date

This table presents the cumulative abnormal returns for the BEL20 Index (Belgium), the DJEurostoxx50 Index

(Eurozone), the OMX Helsinki Index (Finland), the CAC40 Index (France), the

Performance DAX30 Index (Germany), the Milan MIB30 Index (Italy), the AEX Index (The Netherlands), and

the IBEX35 Index (Spain) according to varying business conditions. The abnormal returns are estimated from

the constant mean returns model. The economic states as in McQueen and Roley (1993). Statistical significance

is based on Boehmer et al. (1991) and is denoted (***),(**), and (*) for 1%, 5%, and 10% respectively.

18

Table 9 : Abnormal Returns for the Sectoral Eurozone Stock Indexes at the

Announcement Date

This table presents the cumulative abnormal returns for the noncyclical, cyclical, growth, and financial stock

groups. The de¯nition of the panels comes from a cluster analysis of Stoxx supersectors. The abnormal returns

are estimated from the constant mean returns model. Statistical significance is based on Boehmer et al. (1991)

and is denoted (***),(**), and (*) for 1%, 5%, and 10% respectively.

4.3 Stock Market Reaction to Unexpected ECB Monetary Policy According to

Industry

We finally turn to the question of which sectors are particularly affected by ECB monetary

policy. Based on the industry classification benchmark (ICB) published by Stoxx Ltd., we

carry out our event study among the European supersectors stock indices. ICB defined 10

industries divided in 19 supersectors. To make this classification more adequate to our

methodology, we identify these supersectors in four panels. Unfortunately, because of a lack

of data, the real estate supersector has to be removed of our sample. In Table 9 Panel A, we

aggregate the following supersectors: Oil & Gas, Chemicals, Basic Resources, Food &

19

Beverage, Health Care, and Utilities. These supersectors, over the period of analysis,

appears less sensitive than the others to the business condition. That why we define this

panel \non cyclical". In contrary, Table 9 Panel B is called \cyclical" and it composed by

Construction and Materials, Personal & House Goods, Industrial Goods & Services, Retail,

and Travel & Leisure. Supersectors indexes aggregate in Table 9 Panel C, such as Media,

Technology, and Telecommunications, are indexes that their performance over the period

are fare better than the other indexes. We entitle this panel \growth". We also aggregate

the financial indexes in Table 9 Panel D. The effect of monetary policy on stock market

returns should differ across supersectors for several reasons such as the interest-sensitivity

of the demand, the exchange rate sensitivity for tradable goods industries and o® course the

financial structure of the firms in a supersector. Table 9 reports the results of our event

study on these four panels. First, we find important differences among the panels.

We thus find evidence on hypothesis 3. Second, Panel C reacts as expected. An unexpected

decrease of the MRO rate leads to a rise of the abnormal returns and vice versa. However,

few significant results are concentrated at the status quo event. Third, concerning Panel A, B,

and D, the results indicate that in most of supersectors indexes, financial investors react

badly when occurs a statu quo. Moreover, we observe positive abnormal returns at the

unexpected ECB MRO increase announcements.

5 Conclusion

In this paper, we analyze the Eurozone stock markets' reactions to unexpected ECB

monetary announcements. We construct an index including the ECB's decisions unexpected

by the ECB watchers. Unexpected announcements correspond to an event, and from these

events we carry out an event study in order to assess the abnormal returns of the Eurozone

stock markets.

Our methodology leads us to several results. First, we observe that the ECB's monetary

policy decisions are often predictable. The ECB's communication policy seems to be a

success. Second, we find unexpected changes in ECB monetary policy which affect both

aggregate and domestic Eurozone stock markets, mainly on the announcement date. Our

results suggest that Eurozone stock markets do not react at ECB surprises over the three-

day announcement period. Thus, the incorporation of changes in the ECB's MRO into

Eurozone stock prices is quick. Third, we ¯nd no evidence of an inverse relationship

20

between the abnormal returns of Eurozone stock indexes and MRO around an unexpected

ECB monetary policy announcement. Fourth, we distinguish the stock market reaction

according to business conditions and industries. We observe that the impact of a surprise

monetary policy is negative in a bad business conditions and positive in a good times. Fifth,

the unanticipated changes in the ECB MRO rates announcements have abnormal effects only

for some sectorial stock indexes.

The monetary policy implications of our results are the following. Even if monetary policy

makers would like to impact Eurozone stock markets, they only could do it during good

conditions. However, there is always a lot of uncertainty to determine these periods.

Prudential rules are more likely to have an impact on asset prices. An interesting topic for

further research would be to expand our announcements sample to other information

released by the ECB, such as the ECB's monthly press conferences. Another one would be

to determine the informational content into stock prices of monetary policy news, especially

compare with the other economic news.

21

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