Monetary Policy Decisions by the ECB and Stock Returns: Stock Returns over Weeks between Monetary Policy Decisions

Abstract

This thesis investigates the effect on the returns of the European stock market in the weeks following a monetary policy decision by the European Central Bank over the period 1999- 2019. Prior research by Cieslak et al. (2019) had shown that the equity premium in the U.S. stock market were earned entirely in the even weeks following a Federal Open Market Committee meeting. Two different methodologies were applied for investigating the effect; an event study based on the methodology by MacKinlay (1997) as well asthe methodology that was used by Cieslak et al. (2019). The event study was performed by measuring cumulative abnormal returns and measure if they differ significantly. A parametric test and a non-parametric test were applied for measuring that effect; the standard t-test and the generalized rank test. In a similar manner to Cieslak et al. (2019), the average five-day excess return of the European stock market was studied in a way to observe a weekly pattern in returns. Furthermore, in accordance with their research the relationship between excess return and weekly periods was studied through an ordinary linear regression. The results of this study suggest that returns of the European stock market do not follow a biweekly pattern over the weeks between monetary policy decision over the period 1999- 2019. The cumulative abnormal returns gathered in the event study did not differ significantly from zero for any of the weekly period. The results using the methodology by Cieslak et al. (2019) did not show a sign of pattern either. The five-day average excess return showed no indication of a biweekly pattern and the beta coefficients gathered through the regression did not differ significantly from zero, suggesting no relationship between ECB monetary policy decision weekly cycles and excess return on European stocks