Equity market reactions to the unconventional monetary policy announcements of the ECB: Evidence from Germany between 2008 and 2015

Abstract

In this thesis I examine the equity market reactions to the European Central Bank's (ECB) expansionary unconventional monetary policy announcements between 1.11.2008 and 31.10.2015, using firm-level data from German markets. Exploiting the firm-level data and different measures for financial constraints allows me to sort companies into different portfolios. Hence, I am able to draw more precise conclusions about the equity market reactions and the feasibility of ECB's expansionary unconventional monetary policies compared to previous studies, which have mainly focused on an index-level reactions, especially after the global financial crisis.

The broad approach in this thesis is that I build upon the existing literature of conventional monetary policies and study, whether the same hypotheses and causalities documented before the global financial crisis and with the conventional monetary policies also apply in the aftermath of financial crisis and with the unconventional monetary policies. More specifically, I hypothesize that the average equity market reaction to the ECB's expansionary unconventional monetary policy announcements is positive, financially constrained firms' stock returns after the ECB's expansionary unconventional monetary policy announcements are higher than relatively unconstrained firms', and different industries respond in a heterogeneous way to the ECB's expansionary unconventional monetary policy announcements.

First, I find that the average equity market reaction to the ECB's 12 unconventional monetary policy announcements measured by the DAX index returns amounts to 1.52%. Moreover, only one announcement day was associated with the negative equity market reaction and the firm-level data show that all the portfolios have yielded positive returns, both on the announcement day and the one day longer time window. Second, by using the firm-level data and sorting firms into different portfolios based on the level of financial constraints, I find two-sided results. The results of various tests and five financial constraint measures show clearly that the immediate price reaction of the most financially constrained firms to the ECB's expansionary unconventional monetary policy announcements has been lower than relatively unconstrained firms', which differ from the findings of prior literature. However, with longer time window (-5,5) the cumulative average returns of the financially constrained firms are larger than the unconstrained firms', suggesting that some kind of lead-lag effect exists. Finally, I find some heterogeneity in the responsiveness of different industries to the ECB's expansionary unconventional monetary policy announcements.