Stock market sensitivities to European monetary policy

In this paper, we analyze the transmission of common monetary policy shocks in the euro area to its main stock markets. To this end, we implement SVAR models where the ECB monetary policy is modeled as a function of euro area aggregate economic factors and global economic conditions, which we proxy using US economic variables. Our results suggest, in line with economic theory, that the transmission of monetary policy to euro area stock markets exhibits heterogeneity driven by differences in the characteristics of listed firms. To investigate the sources of this heterogeneity, we test the hypothesis that the sectoral composition of financial markets explains the variation in responses. However, our findings provide evidence against this hypothesis – differences in the reaction of stock markets to monetary policy shocks are not fully accounted for by their sectoral composition.