Browsing by Author "Jääskeläinen, Roope"

This thesis examines Finnish stock market reactions to European Central Bank monetary policy surprises after the Global Financial Crisis. The ECB provided excess liquidity to overcome the crisis and low inflation in Europe throughout the review period, April 2009 – January 2018. These actions improved liquidity conditions and caused a change in financial market environment. Rational investors who were searching return on their capital shifted funds from debt to equity markets. Effects of monetary policy surprises are studied using an event study methodology. The monetary policy surprises are estimated from changes in the term structure of Euribor futures around meetings of the Governing Council of the ECB. The surprises are calculated using factor analysis yielding two latent factors that explain the maximal fraction of the variation in the term structure. A target factor, which measures surprises at the level of the ECB policy rate, and a path factor, which measures surprises in the expected future path of the policy rate. These market-based measures attempt to explain daily returns in Finnish stock market. OMX Helsinki 25 index, which is the Helsinki Stock Exchange leading share index, is used in the thesis. The study shows that the target factor has a negative impact on stock returns, which is in line with previous literature. In turn, the path factor has a positive impact on stock returns, which contradicts the previous literature and the classic asset pricing theory. However, taking the changed market environment into account, the result contributes the understanding about asset pricing further. After a severe real economic activity shock, the unpredictable communication of future monetary policy easing affects stock prices adversely. An unanticipated announcement of future easing is a sign of a deteriorated future state of the economy. In turbulent times, equity traders revise their expectations of future corporate earnings downwards as a response to an easing announcement because a rate hike in the near future is not seen as a likely outcome.