Euro Area Equity Risk Premia and Monetary Policy: A Longer-Term Perspective

28 Pages Posted: 13 Apr 2021

See all articles by Daniel Kapp

Daniel Kapp

European Central Bank (ECB)

Kristian Kristiansen

European Central Bank (ECB)

Date Written: April, 2021

Abstract

This study analyses the effects of euro area monetary policy on equity risk premia (ERP). We find that changes in equity prices during periods of accommodative monetary policy mainly reflected adjustments in the discount factor and economic activity – rather than fluctuations in investors’ required risk compensation. Furthermore, the ERP appears to not have declined much since the introduction of unconventional monetary policy and stands higher than prior to the GFC. Use of identified monetary policy shocks points to insignificant effects of monetary policy on the ERP. Further breakdown of these shocks reveals that monetary policy has a significant upwards impact on the ERP if it is perceived as a negative information surprise, while the opposite prevails in the case of a genuine accommodative monetary policy surprise. Accumulating these effects over time suggests that the two might have largely offset each other since the introduction of unconventional monetary policy.

JEL Classification: E22, E52, G12

Suggested Citation

Kapp, Daniel and Kristiansen, Kristian, Euro Area Equity Risk Premia and Monetary Policy: A Longer-Term Perspective (April, 2021). ECB Working Paper No. 2021/2535, Available at SSRN: https://ssrn.com/abstract=3824860

Daniel Kapp (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Kristian Kristiansen

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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