Firm Characteristics and Stock Markets’ Asymmetric Reactions to Monetary Policy Surprises

The purpose of this study is to find out whether the surprises related to the European Central Bank’s decisions about the level of the key interest rate causes asymmetric reactions among characteristic-classified stock portfolios. Hypotheses propose that the stock returns of small, indebted and unprofitable firms are unequal to the returns of inverse firms. Positive and negative surprises are investigated also separately taking possible nonlinearity into account which exposes whether monetary policy actions have circum-stantial effects on stock prices. The evidence implicates the importance of credit chan-nels in transmission mechanism. The sample data during 1999–2010 consists of the daily returns of stock portfolios constructed from the EURO STOXX index, the ECB’s monthly decisions about the level of the key interest rate, daily values of Euribor and Euribor swap rates for one week and one month maturity and overnight Eonia rate. The different market rates are used to measure the magnitude of surprise and to explain portfolio returns in regression analysis. Seemingly unrelated regression estimation and the Wald test are applied to find hypothetical difference in firm-level. The results imply, as opposed to prior studies, that the firm size is not important factor in this context in the euro area whereas financial standing and profitability are more remarkable. Small firms seem to gain relatively more from monetary policy than large firms and thus show reverse evidence against former understanding. The most indebted firms react to surprises but self-financing firms are immune to them. Profitability-portfolios behave similarly with portfolios related to financial standing but more often average-profitable portfolios are statistically significant than the far portfolios. In general, stocks seem to be more sensible to negative surprises than positive ones. Only trivial signs of nonlinearity are observed. The ECB’s monetary policy decisions are forecasted quite faithfully in stock markets. Still, the sense of credit channel is noticeable in the euro area. The results indicate also problems to find indicator which measure validly and reliably monetary policy surprises.fi=Opinnäytetyö kokotekstinä PDF-muodossa.|en=Thesis fulltext in PDF format.|sv=Lärdomsprov tillgängligt som fulltext i PDF-format