New academic research looks at the impact monetary and fiscal interventions have on global markets, pointing to different reactions based on market sector. Banking sector indexes tend to find benefit from the market interventions while other sectors find lessor benefits, pointing to hedging opportunity.
Do the same monetary and fiscal policy intervention produce different effects on financial and non-financial companies?
The white paper, “Stock Market Reaction To Policy Interventions,” asked three primary questions: Did policy interventions produce positive effects for all (not only financial) listed companies? Did the same policy intervention produce different effects on financial and non-financial companies? Did some policy actions work better than others?
Researchers Franco Fiordelisi, from the University of Rome, and Giuseppe Galloppo, of the Università degli studi della Tuscia, considered results connected to bank bailouts and related assisted mergers and bank failure events. They found a positive impact for the Banking sector yet a negative response for market and non-financial indices. “Observing our results we should conclude for a predominance of negative components,” the white paper concluded.
Considering stock market reactions in 12 developed nations, Belgium, China, France, Germany, Italy, Japan, Netherlands, Spain, Sweden, Switzerland, United Kingdom, and United States, researchers noted that policy interventions might be hedged by considering specific sector niche indices that could perform positive relative to the broad indexes. This is relevant due to “expansionary monetary actions have a negative effect on stock prices, particularly when sector indices are taken into account. The determined that “stock return reacts negatively to restriction measures for general and non-financial sector indices” while often benefiting financial indices.
The study focused on policy interventions over three primary financial crisis period: the US subprime crisis, from June 1, 2007 to September 14, 2008; the Global Financial Crisis (GFC), from September 15 2008 to May 1, 2010; and the sovereign debt crisis. Lasting from May 2, 2011 to June 30 2012. Sectors studied were: Oil & Gas, Basic Materials, Industrials, Consumer Goods, Consumer Services, Health Care, Financials, IT, Telecom and Communication Services and Utilities.
Monetary and fiscal policy intervention are effective in stimulating the banking stocks
“The most remarkable finding is that stock industry-indices react to policy interventions in a different manner to the broad stock index during the financial crisis, suggesting the existence of portfolio diversification opportunities,” a finding consistent with a 2009 academic study. The paper observed that by decreasing interest rates, or otherwise acting in other expansionary monetary measures, “central banks are effective in stimulating the stock market, at least for market and banking stock indices.” However, the impact in the banking sector is not a rising tide lifts all boats impact. “Our findings also show that an impact of expansionary monetary policy tends to decline stock prices when sector indices are taken into account.”
A monetary policy shock in terms of positive interest rate change causes a significant negative impact on market and non-financial sector indices (similar findings are reported by Chatziantoniou et al. 2013). Financial sector Policy actions cause a positive stock reaction when we consider the banking sector while they turn negative,, when market and non financial sector indices come into play.
We observe a strong price reaction to expansionary measures during the first (and the hardest) stage of financial crisis (1st June 2007 –14th September 2008). This is consistent with Basistha et al., (2008) finding that stocks react more strongly to monetary news in periods of weak economy.
The paper’s authors claim this is the first paper providing empirical evidence of different industry reactions to a wide range of conventional and unconventional monetary policy actions, illuminating methods for wealth managers to better manage risk and investment returns.
The post Fiscal Intervention Helps Stocks, But Does Not Rise All Boats the Same – Study appeared first on ValueWalk.
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Mark may hold positions in one or more of the companies mentioned in this article.