Bank excess returns and unconventional monetary policy

ABSTRACT

During the Global Recession, the Federal Reserve Board (Fed) and the European Central Bank have implemented a series of unconventional monetary policy (UMP) measures. We argue that these programmes increased bank equity values in both the US and Europe via asset pricing channels. Using an event-study approach, we find that announcement of UMP actions amplified bank excess returns, especially during the first round of quantitative easing in the US and outright monetary transaction programmes in Europe. We also find evidence supporting market beta shifts subsequent of some major UMP announcements. Using the estimated shadow rates, we provide further empirical evidence on the continuous effect of monetary policy shocks on bank excess returns. Our results show that bank excess returns responded at least twice as stronger to monetary policy actions at the zero lower bound.

KEYWORDS:

• Monetary policy
• bank
• zero lower bound
• quantitative easing
• stock market

JEL CLASSIFICATION:

• E44
• E52
• G12
• G21

Acknowledgements

I would like to thank YoungKeun Oliveira and Kenneth Kent for their help on data collection, as well as conference participants of the Liberal Arts Macroeconomics Workshop at Wake Forest University in August 2018 for their valuable feedback.

Disclosure statement

No potential conflict of interest was reported by the author.