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Econometrics 2018, 6(3), 36; https://doi.org/10.3390/econometrics6030036

The Relation between Monetary Policy and the Stock Market in Europe

1
Department of Economics, Freie Universität Berlin, 14195 Berlin, Germany
2
DIW Berlin, 10117 Berlin, Germany
3
Department of Economics and Finance, Tallinn University of Technology, 12618 Tallinn, Estonia
4
Economics and Research Department, Bank of Estonia, 15095 Tallinn, Estonia
These authors contributed equally to this work.
*
Author to whom correspondence should be addressed.
Received: 21 March 2018 / Revised: 25 July 2018 / Accepted: 31 July 2018 / Published: 5 August 2018
(This article belongs to the Special Issue Celebrated Econometricians: Katarina Juselius and Søren Johansen)
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Abstract

We use a cointegrated structural vector autoregressive model to investigate the relation between monetary policy in the euro area and the stock market. Since there may be an instantaneous causal relation, we consider long-run identifying restrictions for the structural shocks and also used (conditional) heteroscedasticity in the residuals for identification purposes. Heteroscedasticity is modelled by a Markov-switching mechanism. We find a plausible identification scheme for stock market and monetary policy shocks which is consistent with the second-order moment structure of the variables. The model indicates that contractionary monetary policy shocks lead to a long-lasting downturn of real stock prices. View Full-Text
Keywords: cointegrated vector autoregression; heteroscedasticity; Markov-switching model; monetary policy analysis cointegrated vector autoregression; heteroscedasticity; Markov-switching model; monetary policy analysis
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Lütkepohl, H.; Netšunajev, A. The Relation between Monetary Policy and the Stock Market in Europe. Econometrics 2018, 6, 36.

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