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School of Business | Department of Finance | Finance | 2014
Thesis number: 13735
Monetary policy announcements of the European Central Bank and the Federal Reserve System in 2008 - 2013: Impacts on CDS spreads and equity markets
Author: Lehto, Eemeli
Title: Monetary policy announcements of the European Central Bank and the Federal Reserve System in 2008 - 2013: Impacts on CDS spreads and equity markets
Year: 2014  Language: eng
Department: Department of Finance
Academic subject: Finance
Index terms: rahoitus; financing; rahapolitiikka; monetary policy; Yhdysvallat; United States; keskuspankit; central banks; Eurooppa; Europe; osakemarkkinat; stock markets; arvopaperimarkkinat; stock exchange markets
Pages: 91
Key terms: ECB; the FED; monetary policy; unconventional methods; announcement impacts; event study; quantitative easing; credit easing; signalling; portfolio balancing; bank centric; enhanced credit support; LSAP; market-based financing; monetary policy shock; economic shock

In this Thesis I study the immediate impacts of monetary policy announcements on credit spreads and equity prices by applying event study approach during time period from the beginning of 2008 until end of 2013. Main objective is to show comparison between the impacts as result of ECB's and the Fed's policy decisions. Emphasis in this Thesis is on differing unconventional monetary policy announcements between the two institutions.


Data in this Thesis contains daily change observations for set of financial data for European and US corporate CDS spreads, equity markets and interest-rate variables for the time period from 1 January 2008 to 31 December 2013. Additionally I have sorted and selected the main monetary policy decision announcement events during the same time period. The sample of selected announcements includes 27 different events in case of the Fed and 26 events in case of ECB. Also 16 events related to European Stability Mechanism (ESM) and European Financial Stability Facility (EFSF) are included. Analysis is primarily based on ordinary least square event study regressions. To further examine the differences in impacts by the Fed and ECB, I also quantify the sensitivity of corporate credit spreads and equity markets on the changes in the risk-free interest rates induced by the unconventional monetary policy announcements.


Despite the differences in the Fed's and the ECB's unconventional monetary policies, both the Fed's and ECB's unconventional policy announcements have approximately equivalent magnitude impact on credit spreads and equity prices in their respective monetary policy regions. ECB's expansionary unconventional announcements reduce on average the credit risk premium for European high yield corporates by 18 bps and for European investment grade corporates by 6 bps. European equity prices increase on average 1.5%. The Fed's expansionary unconventional policy announcements reduce on average the credit risk premium for US high yield corporates by 16 bps and for US investment grade corporates by 4 bps. US equity prices increase on average by 0.9%. These impacts of unconventional announcements recorded in this Thesis are comparable to impacts recorded in earlier event-studies on the Fed's unconventional policies and policy rate changes before the financial crisis. Further, I also find some indication of financial markets interpreting ECB's unconventional policy decisions more as economic shock whereas the Fed's unconventional policy announcements have some characteristics of monetary policy shock impacts trough the announcement induced changes in risk-free rates.
Master's theses are stored at Learning Centre in Otaniemi.