The International National Stock Markets of the Nordic Countries – The Effects of Monetary Policy

Abstract

This paper measures the effects of key target rates surprises on the returns in the stock exchanges of the Nordic countries – both the initial and the delayed impact. The key target rate decisions of the European Central Bank and the Federal Reserve are considered. The inclusion of two different central banks allows for the distinction and comparison between the monetary union’s internal effects and the spillover effects from another banking system.

The results uniformly conform to the nonuniformity the related literature suggests: by and large, unanticipated target rate hikes are met with falls in stock indices, but the specifics of the magnitude and manner vary greatly. Overall, on the first two days following an unanticipated target rate hike, all Nordic stock exchanges reacted negatively, ranging from – 2 % to – 5 % daily loss in each index. However, the effects are far from instantaneous, as in most cases the negative statistically significant coefficient was only observed on the second day relative to the announcement. There also seems to exist a significant asymmetry between the reactions to unanticipated positive and negative rate changes.