The impact of monetary policy interventions on banking sector stocks: an empirical investigation of the COVID-19 crisis

Abstract

AbstractThe enduring impact of the COVID-19 crisis on the financial sector is undeniable, persisting far beyond the eventual waning of the pandemic. This research examines central bank interventions during the pandemic, using a quantitative event study approach over a five-day window to analyse the impact of 188 monetary policy announcements on banking stocks in China, the U.S., and Europe. Our results demonstrate how monetary policy announcements targeting different economic mechanisms have produced a diverse market reaction throughout the COVID-19 pandemic. Namely, cuts in interest rates and the maintenance of a low interest rate environment by the Federal Reserve resulted in negative abnormal returns in the U.S.A., while short-term announcements surrounding intra-day credit and liquidity provisions boosted banking sector stock prices. In Europe, a muted reaction by the banking sector was observed, with negative abnormal returns observed in response to the ECB’s 2% inflation objectives. Finally, banking stocks in China responded strongly and positively to foreign currency and exchange-related announcements by the People’s Bank of China. The results and insights from this analysis can thus inform preparations made by policymakers, governments, and financial market stakeholders in the event of future waves of COVID-19, or further extreme societal disruptions.