The Effect of The Policies

Journal of Financial Stability 11 (2014) 4961
Contents lists available at ScienceDirect
Journal of Financial Stability

journal homepage: www.elsevier.com/locate/jfstabil
The effect of monetary policy interventions on interbank markets,

equity indices and G-SIFIs during nancial crisis
Franco Fiordelisi a, , Giuseppe Galloppo b , Ornella Ricci a
a
b
University of Rome III, via Silvio DAmico 77, 00145 Rome, Italy
University of La Tuscia, 01100 Viterbo, Italy
a r t i c l e
i n f o
Article history:
Received 21 December 2012
Received in revised form 12 June 2013
Accepted 3 December 2013
Available online 11 December 2013
JEL classication:
E58
Keywords:
Financial crisis
Policy
Event study
Banking
a b s t r a c t
Since 2007, monetary authorities around the globe have reduced their key policy interest rates to unprecedented low levels and intervened with non-standard policy measures (i.e., monetary easing and liquidity
provision) to support funding conditions for banks, enhance lending to the private sector and contain contagion in nancial markets (e.g., European Central Bank, 2011). Using a detailed dataset of monetary policy
interventions between June 2007 and June 2012 in the most advanced monetary areas (the Euro area,
Japan, the U.S., the UK and Switzerland), we analyze their effects at three different levels, including (1)
the interbank credit market, considering the 3-month LIBOR-OIS spread as a measure of nancial distress
(e.g., Taylor and Williams, 2009); (2) the stock market, represented by wide equity indices; and (3) the
banking sector, focusing on global systematically important nancial institutions (G-SIFIs). We demonstrate that different monetary policy interventions from single central banks have produced a diverse
market reaction. Standard measures have been more effective than non-conventional ones in restoring
the interbank market, which is fundamental for maintaining a fully operational traditional interest rate
channel and for guaranteeing the normal functioning of nancial intermediation. Non-traditional measures have registered a stronger stock market reaction with respect to standard interest rate decisions,
both in terms of broad equity indices and single prices of large banks.
2013 Published by Elsevier B.V.
1. Introduction
Since the nancial crisis erupted in mid-2007, central banks
throughout the world have run a wide set of monetary policy interventions using new instruments and techniques. The ultimate goal
of monetary policy interventions implemented during the crisis
has been to restore monetary stability and thus re-establish the
stability of nancial (and banking) systems. At the beginning of the
nancial crisis, central banks interventions designed to contain the
crisis seemed to be working. Although the losses in the subprime
mortgage market were substantial, these losses seemed manageable, thereby leading most policy makers to hope that the worst
was over and that the nancial system would soon begin to recover
(see Mishkin, 2010). However, a tremendous set of shocks was
recorded in September 2008, such as the collapse of Lehman Brothers and AIG and the run on the Reserve Primary Fund (Mishkin,
Corresponding author at: University of Rome III, via Silvio DAmico 77, 00145
Rome, Italy. Tel.: +39 06 5733 5672; fax: +39 5733 5797.
E-mail addresses: franco.ordelisi@uniroma3.it, franco.ordelisi@unibocconi.it
(F. Fiordelisi), galloppo@unitus.it (G. Galloppo), ornella.ricci@uniroma3.it (O. Ricci).
1572-3089/$ see front matter 2013 Published by Elsevier B.V.
http://dx.doi.org/10.1016/j.jfs.2013.12.002
2010). After these events, the nancial crisis evolved into a global
crisis generating a severe economic contraction. Overall, the nancial crisis (labeled as once-in-a-century credit tsunami1 by Alan
Greenspan) seemed to sweep away the condence in the ability
of central bankers to successfully manage the economy (Mishkin,
2011, p. 30) as central banks success in stabilizing ination and
the decreased volatility of business cycle uctuations made policymakers complacent about the risks from nancial disruptions. The
benign economic environment leading up to 2007, however, surely
did not protect the economy from nancial instability (Altunbas
et al., 2010; Marqus-Ibnez

and Gambacorta, 2011). Indeed, it
may, instead, have promoted excessive risk taking, causing the
nancial system to become even more fragile.
To face the crisis, the rst answer of monetary authorities
around the globe was to reduce their key policy interest rates
to unprecedented low levels. In addition, to overcome the malfunctioning of the interbank market and keep the transmission
mechanism through the interest rate channel fully operational,
1
Alan Greenspan described in Congressional testimony the nancial crisis as a
once-in-a-century credit tsunami.
50
F. Fiordelisi et al. / Journal of Financial Stability 11 (2014) 4961
they intervened with a number of non-standard policy measures,

such as monetary easing and liquidity provision. Non-standard
measures aimed to support funding conditions for banks, to
enhance lending to the private sector, and to contain contagion
in nancial markets were implemented (e.g., ECB, 2011).
In this framework, our paper aims to answer the following central questions. (1) Which monetary policy interventions are more
effective in restoring the normal functioning of the interbank market? (2) What is the effect of monetary policy interventions on
equity markets? (3) What is the effect of monetary policy interventions on the stock prices of banks?
Specically, we select a wide set of monetary policy interventions between June 1st, 2007 and June 30th, 2012, and we
then estimate the market reaction around their announcement
by focusing on three levels. Consistent with extant literature (e.g.,
Thorbecke, 1997; Ehrmann and Fratzscher, 2004; Bernanke et al.,
2004; Gagnon et al., 2011; Swanson et al., 2011), we assess the
effect of each monetary policy intervention by adopting an event
study methodology. As outlined in Gagnon et al. (2011), the underlying assumption in such studies is that markets are efcient in
the sense that all of the interventions effects occur when investors
update their expectations, not when actual measures occur. As a
consequence and as highlighted in Swanson et al. (2011), a oneor two-day estimation window around a major macroeconomic
announcement is sufcient to provide an unbiased estimate of
the complete effect of that announcement. First, we estimate the
impact on the 3-month LIBOR-OIS spread, consistent with AtSahalia et al. (2012) as they estimate the impact on the interbank
and liquidity risk premia. With respect to their study, this paper
analyzes a much longer time interval (i.e., considering also the
sovereign debt crisis). In addition, we measure a wider system
effect with a focus on stock markets. To this aim, we rst concentrate on broad equity indices (MSCI Switzerland, MSCI Japan, MSCI
EMU, MSCI UK and MSCI USA) to capture the stock market in each
monetary area (Switzerland, Japan, Euro area, the UK and the U.S.,
respectively). Second, we measure the impact on the stock returns
of the 27 worldwide global systemically important nancial institutions (G-SIFIs), as released by the Financial Stability Board on 4th
November 2011.
The remainder of the paper is organized as follows: Section 2
provides a review of past literature and outlines the contribution
of the paper; Section 3 describes the collection and classication
of monetary policy interventions over the investigated period;
Section 4 is devoted to the event study methodology applied to
measure market reactions; Section 5 presents and discusses our
main results. Finally, in Section 6 we draw our conclusions, outlining the limitations of this work and some directions for future
research.
2. Past literature and contributions of the paper

Our paper brings together two strands of the existing literature. The rst is the literature that assesses the impact of monetary
policy interventions on stock markets. The link between monetary
announcements and asset pricing is an important topic from the
perspectives of both monetary policy makers and investors. From
the monetary policy makers perspective, the asset price response
to the Federal Reserve (or other central banks) policy is critical for
understanding policy transmission mechanisms such as the inuence of monetary actions on the monetary outputs and inations
through an indirect process based on nancial markets (Bernanke
and Kuttner, 2005). From the perspective of an investor, monetary
policy interventions are fundamental as they are often associated
with large stock price movements.
Responses to monetary policy announcements have been investigated with respect to stock prices and volatility (Bomn, 2003;
Ehrmann and Fratzscher, 2004; Bernanke and Kuttner, 2005; Chuli
et al., 2010; Rangel, 2011; Rosa, 2011), international bond returns
(Bredin et al., 2010), interest rates (Hausman and Wongswan,
2011; Len and Sebestyn, 2012) and exchange rates (Hausman
and Wongswan, 2011). While this literature has grown during the
last decade, most papers (Bomn, 2003; Ehrmann and Fratzscher,
2004; Bernanke and Kuttner, 2005; Chuli et al., 2010; Hausman
and Wongswan, 2011; Rangel, 2011; Rosa, 2011) focus on the U.S.
assessment of how central banks interventions on interest rates
relate to asset prices. There are, however, a few papers dealing with
other currency areas (e.g., Len and Sebestyn, 2012 analyze the
ECB monetary policy; Bredin et al., 2010 consider the UK, U.S. and
Euro areas).
The second strand of literature assesses the effectiveness of
policy responses to the global nancial crisis. In this case, the
number of studies is much less than that for the former literature strand, and empirical analyses are generally quite narrow in
scope, focusing on single measures in specic markets. For example, McAndrews et al. (2008) examine the effectiveness of the
Federal Reserves Term Auction Facility (TAF) in mitigating liquidity
problems in the interbank funding market, while Baba and Packer
(2009) analyze the effect of the swap lines among central banks in
reducing the dollar shortage problem. It is worth emphasizing that
the attention of researchers has recently moved from conventional
to non-conventional measures. In this regard, Cecioni et al. (2011)
provide a comprehensive review of contributions related to the
impact of non-conventional measures on nancial and macroeconomic variables, with reference to both the U.S. and the Euro area.
The evidence suggests that these measures have been generally
effective in reducing interest rates and in avoiding a larger collapse in output. Nevertheless, the authors emphasize that there is a
substantial degree of uncertainty surrounding the precise quantication of these effects for several reasons, including the difculties
associated with capturing the role of non-conventional measures
in contrasting credit rationing.
The key starting point for our research is the work of At-Sahalia
et al. (2010, 2012) because, with respect to other studies investigating policy response to the nancial crisis, their work assesses the
effects on the credit market of a wide set of policy interventions
in various countries. Specically, At-Sahalia et al. (2012) examine
the effect of policy announcements (scal and monetary policies,
liquidity support, nancial sector policies, and ad-hoc bank failures) on interbank credit and on liquidity risk premia in the U.S.,
Euro area, UK and Japan between June 2007 and March 2009. The
authors assess the policy effect on the day-to-day changes in the
3-month LIBOR-Overnight Index Swap (OIS) rate spread whereby
they consider the LIBOR-OIS spread as a proxy for the liquidity
and counterparty risk premia in the global interbank markets. In
summary, the authors show policy announcements were usually
associated with reductions in the LIBOR-OIS spreads, but there is
no policy action that is better than the others for containing the
crisis.
Our paper contributes to the previous literature in several ways.
First, we extend the study of At-Sahalia et al. (2012) by considering the impact of both conventional and non-conventional
monetary policy measures on the 3-month LIBOR-OIS spread
(intended as a measure of nancial distress, see Taylor and
Williams, 2009) over a longer time period, that is, from June 2007
to June 2012. We believe this extension to be crucial in light of the
most recent events that reveal that the global nancial crisis did
not end in March 2009 as supposed by At-Sahalia et al. (2012).
Specically, we intend to include three more years of observation,
thus also covering the period of the Euro sovereign debt crisis.
Accordingly, our paper is the rst to focus on the nancial crisis

(from 1 June 2007 to 30 June 2012) by distinguishing its three
stages: the U.S. subprime crisis (from 1 June 2007 to 14 September
2008), the global nancial crisis (from 15 September 2008 to 1
May 2010) and the sovereign debt crisis (from 2 May 20102 to 30
June 2012). Because the nancial crisis over the last two years was
essentially driven by sovereign debt, especially in the Euro area
(Greece, Italy, Spain, Portugal), we believe it is crucial to analyze
the effectiveness of monetary interventions in the Euro area and
in related countries, thus we add Switzerland to the analysis.
Second, we do not limit our investigation to the interbank market as we also measure the impact of monetary policy interventions
on equity markets. We believe this may provide a relevant contribution for both conventional and non-conventional measures.
With respect to standard interest rate decisions, there is already
a substantial literature assessing their effects on stock markets;
however, most contributions are related to the U.S., and because
the empirical investigations generally end before 2008, they do
not consider the spread of the global nancial crisis. We believe
that extending the analysis to the most recent period deserves special attention, as investors behaviors, and thus market responses,
may strongly differ between times of crisis and times of prosperity.
With reference to non-conventional measures, to our best knowledge, there are no studies that assess the impact of the crisis on
equity markets. This is quite surprising as different monetary policy instruments are likely to produce different results. For example,
monetary policy targets (output and ination) are, in fact, inuenced by monetary instruments through an indirect process that
passes through nancial markets, and as a result, the nal effect is
uncertain. Traditionally, central banks interest rate cuts (in normal
circumstances) are transmitted smoothly to short-term interest
rates, and then to longer-maturity rates, which are the most relevant for private sector decision making (known as the interest
rate channel). Recently, central banks have been increasingly using
different interventions to ease monetary stress (e.g., central banks
purchase government or corporate bonds) and to provide liquidity support. Such interventions for the latter include the provision
of liquidity in domestic currency by offering more frequent auctions, longer maturities for renancing operations and extensions
of accepted collateral. While these monetary policy interventions
aim to support economic activity and banking stability, the market
reactions to their announcements may be different (ECB, 2010, p.
62; ECB, 2011, p. 55). As highlighted by Cecioni et al. (2011), nonconventional measures may affect economic and nancial variables
through two channels of transmission, the signaling channel and
the portfolio-balance channel. The rst is activated through communication. When interest rates are near the zero lower bound, the
announcement of non-conventional measures impacts investors
expectations and thus signals the strong commitment of central
banks to provide stimuli to the economy and challenge the crisis.
The second channel operates by solving difculties in some specic dysfunctional segments of the nancial market such as central
banks resort to asset purchases and liquidity injections to inuence the prices of a wide set of securities and to mitigate nancial
frictions due to funding conditions. Focusing on the impact of monetary interventions on stock prices, Bernanke and Kuttner (2005)
suggest that policy interest rate changes affect stock prices by inuencing (1) expected future cash ows; (2) expected future risk-free
rates used to discount cash ows; and (3) risk premia. Focusing on
the latter component, the ECB (2008) suggests that monetary policy interventions inuence risk premia as there is a direct impact
2
On 2nd May 2010 the Euro zone members and the International Monetary Fund
agreed to a bailout package to rescue Greece.
51
on both the perceived riskiness of certain assets (e.g., through an

increase in funding costs and the consequent weakening of rms
balance sheets) and the risk compensation required by investors
(e.g., modifying their risk appetite).
We believe that this reasoning may be applied to non-standard
monetary policy measures as well. For example, it is quite logical to expect that a liquidity injection may affect both future cash
ows and risk premia for non-nancial rms, thereby improving funding conditions and, consequently, making possible new
investments and/or avoiding liquidity problems. This common conceptual framework does not allow for the formulation of specic
hypotheses on the magnitude of the effect of each monetary policys measure on stock prices, but it suggests that it is logical to
empirically assess and compare the impacts of both standard and
non-standard measures on asset pricing during a crisis period.
Finally, we do not limit the analysis to the impact on broad
stock equity indices, but rather, we also consider the individual
stock price of global systemically important nancial institutions
(hereafter, G-SIFIs). We believe this is an important contribution
to the existing literature that, until now, has always considered
the impact of monetary interventions on individual stock prices
of non-nancial companies. The relevance of this point appears
even greater if we consider that nancial intermediaries, and large
banks in particular, have been at the center of the nancial crisis,
giving renewed impetus to the interconnection between nancial stability and the monetary policy (Adrian and Shin, 2008).
As a consequence, banks are no longer only part of the monetary
transmission channel, but they are now often the main subjects of
policy interventions. To our knowledge, the only paper to assess the
effectiveness of policy interventions on the stock market price of
banks is that of Panetta et al. (2009). However, because the authors
investigate government rescue plans, they nd no evidence of a
positive market reaction. In their opinion, results are explained by
concerns about the dilution of shareholders rights, public interventions in bank management and uncertainties regarding the
duration of the plan. Monetary policy interventions, in particular
non-conventional measures, are substantially different from rescue plans, though they may undoubtedly contribute to restoring
the banking system. Therefore, their impact on the individual stock
prices of banks certainly deserves empirical investigation.
3. Collecting monetary policy interventions
We analyze the monetary policy interventions relative to ve
currency areas: the Euro area (EUR), Japan (JPN), the United Kingdom (UK), the United States (US) and Switzerland (CH), considering
the 5-year period from June 2007 to June 2012. Data have been collected from various sources. For the period June 2007 to March
2009, we draw information from the database compiled by the
National Bureau of Economic Research (At-Sahalia et al., 2010,
2012). For the period April 2009 to the end of June 2012, we collect
data from ofcial announcements (in the form of press releases)
from the European Central Bank, Bank of Japan, Bank of England,
Federal Reserve and Swiss National Bank. Specically, we distinguish between announcements from a single central bank3 and
coordinated measures as announced in a single joint press release
(e.g., Bank of England, Bank of Japan, European Central Bank, Federal Reserve and Swiss National Bank adopted joint measures on
3
Among single announcements, we have few cases in which central banks do
not release a joint communication, but independently adopt similar decisions on
the same day. In our sample, there are only 4 cases, all regarding interest rate cuts:
8/10/2008 (CH, EUR, UK, US); 6/11/2008 (CH, EUR, UK); 4/12/2008 (EUR and UK);
5/03/2009 (EUR and UK).
52
13/10/2008 to improve liquidity in the short-term U.S. dollar funding market).

Building on the At-Sahalia et al. (2010, 2012) framework,
we classify monetary policy interventions as follows: (a) interest rate decisions; (b) monetary easing decisions; and (c) liquidity
decisions. Specically, interest rate decisions consist of interest
rate cuts (IR CUT), increases (IR INCR) and no changes (IR UNC).
Monetary easing decisions (MON EASE) include central banks purchases of government bonds (quantitative easing) or corporate
bonds (credit easing) in primary or secondary markets. The decisions to stop a monetary easing program, such as the Bank of
England stopping some part of the asset purchase program on
15/11/2010 after determining it was no longer necessary given the
improvements in nancial market functioning, constitute a separate category [MON EASE()]. Regarding liquidity decisions, this
category includes various measures, such as4 (1) the provision of
liquidity in domestic currency, i.e., more frequent auctions, longer
maturities for renancing operations or extensions of accepted
collateral (LIQ DOM); (2) the provision of liquidity in foreign currencies through swap agreements between central banks or central
banks facilities for liquidity in a foreign currency (LIQ FOR); (3)
the restrictions to the liquidity provided in the domestic currency
[LIQ DOM()], which are separately identied, such as the Federal
Reserve reduction of credit offered by the Term Auction Facility
(TAF) on 25/06/2009.
Depending on the aims of the central bank initiative, we distinguish two categories, expansionary measures and contractionaryinaction measures.5 Specically, we classify interest rate cuts
(IR CUT), monetary easing (MON EASE), and liquidity support [in
both domestic (LIQ DOM) and foreign currencies (LIQ FOR)] as
expansionary monetary policy measures. We dene policy inaction/restrictive monetary policy as interest rate increases (IR INCR),
no change in target rates (IR UNC), end of monetary easing programs [MON EASE()] and liquidity restrictions [LIQ DOM()].
By using an event study methodology, we address the problem
of overlapping events. Focusing on press releases by the same
institutions and occurring on the same day, we adopt the following
criteria. (1) When different announcements belong to the same
event-type category, we treat them as a single event. For example,
on 6/02/2009, the Bank of England announced the purchase of corporate bonds through a secondary market scheme, a commercial
paper facility and the acquisition of Gilts. All them are considered
as a single event in the category of monetary easing, MON EASE.
(2) When there is a decision to change the target interest rate,
we consider it as the main event, and thus we drop all the other
events from the event study analysis. For example, on 5/03/2009,
the European Central Bank decreased the main renance rate by
50 basis points and also decided to continue the xed rate tender
procedure with full allotment for all main renancing operations,
special-term renancing operations and supplementary and
regular longer-term renancing operations for as long as needed
and for any case beyond the end of 2009. Thus, we give more
relevance to the interest rate cut6 in this situation. (3) When
4
Restrictions to the liquidity provided in foreign currencies are not considered
in the empirical analysis, because we found only two cases in which central banks
decided to discontinue foreign swap agreements previously signed.
5
Because restrictive measures were quite rare during the nancial crisis, we
treated these monetary interventions together with policy inaction (consistent with
At-Sahalia et al., 2012).
6
The choice of assigning priority to traditional interest rate decisions was motivated by the characteristics of the analyzed database. First, it is worth noting that
there is only a handful of overlapping cases; second, most of these cases can be
solved considering that overlapping announcements about non-conventional measures were quite often a specication of technical details regarding previously
there is a decision to leave the current situation unchanged or to

continue with a measure previously dened, we consider it less
important than other announcements in the same press release.
For example, on the 28/10/2010, the Bank of Japan declared it
would maintain the overnight call rate at 00.1% and announced
an asset purchase program to encourage the decline in longer-term
interest rates and risk premiums. In this case, we consider the asset
purchase program the main event. We apply the same criteria for
announcements that do not exactly leave the situation unchanged,
but simply give some technical specications for programs already
announced to the market. (4) If the aforementioned criteria are
not sufcient to extrapolate a single event from a package of
interventions, we identify the main event on the basis of its
prominence in the nancial press, as in At-Sahalia et al. (2012).
At the end of the selection process, our nal sample (excluding overlapping announcements7 ) includes 454 events, that is, 419
from single central banks press releases and 35 from joint communications. We report some descriptive statistics in Table 1, Panel A.
Because we have few events in some categories (e.g., increases in
interest rates, end of monetary easing programs and foreign liquidity), we reclassify these events to conduct statistical tests on
estimated cumulative abnormal returns (CARs) as shown in Table 1,
Panel B.
To investigate whether the impact of given monetary policy
interventions change over time, we divide the time period investigated (June 2007 to June 2012) into three sub-periods. Consistent
with At-Sahalia et al. (2010, 2012), the rst period runs from 1st
June 2007 to 14th September 2008 (i.e., the day before the collapse
of Lehman Brothers) and is labeled as the subprime crisis phase.
The second period runs from 15th September 2008 to 1st May 2010
(i.e., the day before the beginning of the European sovereign debt
crisis phase, generally identied as 2nd May 2010, when the Euro
zone members and the International Monetary Fund agreed to a
bailout package to rescue Greece for D 110 billion). We label this
sub-period the global nancial crisis. The nal, period runs from
2nd May 2010 and the end of the investigated period. We label this
sub-period the sovereign debt crisis. The distribution of the monetary policy interventions over these three sub-periods is reported
in Table 2 (Panel A for single announcements and Panel B for joint
announcements).
4. Measuring nancial and bank distress
In this section, we present our methodology for measuring
the impact of several monetary policy interventions on interbank
credit and liquidity risk premia (Section 4.1) and on stock markets
(Section 4.2). In both cases, we adopt an event study approach.
As outlined by Bernanke et al. (2004), using sufciently narrow
event windows, the event study provides a precise estimate of the
markets response to central bank announcements. A similar perspective is expressed in other studies (e.g., Gagnon et al., 2011;
Swanson et al., 2011), which state that under the assumption of
market efciency, the interventions effects occur when investors
update their expectations, not when actual measures occur and
that a one or two-day estimation window is sufcient to provide
an unbiased estimate of the complete effect of the announcement.
announced decisions. Consistent with another criterion of ours, detail specications

are supposed to generate a lower market reaction with respect to the announcement
of new interventions.
7
Once we have excluded overlapping announcements, there are still some cases
(36 of 419) of events that are separated one from each other by less than 3 days.
These may be considered overlapping for the longest window of our event study.
However, we decide to keep them in the sample to avoid discretional selection.
53
Table 1
Monetary policy interventions between June 2007 and June 2012 in 5 currency areas: European Union, Japan, U.K., U.S. and Switzerland. This table lists all monetary policy
interventions collected from European Central Bank, Bank of Japan, Bank of England, Federal Reserve and Swiss National Bank over June 2007June 2012. Panel A reports a
sample description using the following categories: IR CUT denotes interest rate cuts; IR INCR indicates interest rates increased; IR UNC indicates interest rates unchanged;
MON EASE indicates monetary easing interventions and MON EASE() the end/reduction of these initiatives; LIQ DOM indicates liquidity provision in the domestic currency;
LIQ DOM() indicates liquidity drain in the domestic currency; LIQ FOR indicated liquidity provision in foreign currency; Panel B reports a more synthetic and operational
classication using the following categories: Expansionary measures (EXP MP), where: IR CUT denotes interest rate cuts; LIQ+ indicates liquidity provision, in both domestic
or foreign currencies; MON EASE indicates monetary easing interventions; and Policy Inaction and Restrictive Measures (INA RES) where: IR UNC/INCR indicates interest
rates increased or unchanged; CONTR indicates liquidity drain or end/reduction in monetary easing programs.
Interest rate decisions (218 obs)
Monetary easing decisions (49 obs) Liquidity decisions (187 obs)

MON EASE
MON EASE()
All decisions
IR CUT
IR INCR
Panel A sample description

Swiss National Bank (CH)
European Central Bank (EUR)
Bank of Japan (JPN)
Bank of England (UK)
Federal Reserve (US)
7
9
3
9
10
1
4
0
1
0
18
29
50
46
31
0
3
31
9
5
0
0
0
1
0
2
33
18
6
58
0
3
0
0
23
5
1
2
1
0
33
82
104
73
127
Single announcements
Joint announcements
38
0
6
0
174
0
48
0
1
0
117
0
26
0
9
35
419
35
Total announcements
38
174
48
117
26
44
454
IR CUT
IR UNC
LIQ+
MON EASE
EXP MP
LIQ DOM
IR UNC/INCR
LIQ DOM()
CONTR
LIQ FOR
INA RESTR
Total
Panel B classication of single monetary policy announcements

7
7
9
34
20
3
Bank of Japan (JPN)
9
7
10
58
0
3
31
9
5
14
46
54
25
73
19
33
50
47
31
0
3
0
1
23
19
36
50
48
54
33
82
104
73
127
48
212
180
27
207
419
38
126
Source of data: Authors elaboration on European Central Bank, Bank of Japan, Bank of England, Federal Reserve and Swiss National Bank institutional websites; At-Sahalia
et al. (2010, 2012).
As a consequence, the short-run market response is suggestive of

policies long-term effectiveness (At-Sahalia et al., 2010, 2012).
Jawadi et al. (2010), measuring the degree of effectiveness of central
bank interventions by the accuracy and rapidity of market reactions
in the direction expected by monetary authorities, also support
this view. Not only does the event study approach t with our
research objectives, it also presents some advantages compared to
alternative methodologies, such as a regression analysis. First, the
event study approach is able to work with a limited sample size.
In addition, the use of short event windows can limit confounding
effects between the impact of several measures announced in a

limited period of time, and it can also reduce potential endogeneity between policy announcements and market responses
(At-Sahalia et al., 2010, 2012). Finally, by using a narrow event
window surrounding each announcement, an event study holds
other macroeconomic factors constant and thereby better isolates
the effects of each announcement on the nancial markets. Finally,
the event study approach is particularly suitable for assessing the
effect of non-conventional decisions, and as a consequence, it is
used in several studies (Gagnon et al., 2011; Joyce et al., 2011;
Table 2
Crisis timeline: monetary policy interventions from June 2007 to June 2012. This table reports the number of monetary policy announcements released by European Central
Bank, Bank of Japan, Bank of England, Federal Reserve and Swiss National Bank in three different stages of the investigated period. Panel A reports time distribution for single
central banks announcements. Panel B reports time distribution for joint communicates by two or more central banks. EXP MP indicates expansionary monetary policy
measures and INA RESTR monetary policy inaction or restrictive measures. Subprime crisis denotes the period between 1st June 2007 and 14th September 2008. Global
nancial crisis denotes the period between 15th September 2008 and 1st May 2010. Sovereign debt crisis denotes the period between 2nd May 2010 and 30th June 2012.
Subprime crisis
Panel A single announcements

Bank of Japan (JPN)
Panel B joint announcements

Joint announcements
Global nancial crisis
Sovereign debt crisis
EXP MP
INA RESTR
EXP MP
INA RESTR
EXP MP
INA RESTR
2
11
0
5
19
37
5
10
17
13
4
49
9
18
22
18
53
120
5
12
15
10
17
59
3
17
32
2
1
55
9
14
18
25
33
99
Subprime crisis
21
Source: Authors elaboration on European Central Bank, Bank of Japan, Bank of England, Federal Reserve and Swiss National Bank institutional websites; At-Sahalia et al.
(2010, 2012).
54
Swanson et al., 2011). While for standard decisions, it is possible to have a measure of interest rate changes (and to also
isolate the unexpected portion, as in Bernanke and Kuttner, 2005)
that can be included as a regressor in a model explaining asset
prices, the same is not feasible for most non-conventional decisions (for example, the decision to introduce a full allotment or
to accept a wide range of collaterals in renancing operations).
For all these reasons, we believe that the event-study approach
is a valid methodology to answer our research questions. However, as outlined by Veronesi and Zingales (2010), an event study
approach is unable to measure the systemic effect of a policy intervention, since this effect is commingled with many other events
taking place at the same time. As a consequence, it is important
to consider that the same type of event (e.g., an interest rate cut)
may have a different impact depending on the implementation
of the measure itself, and on other measures (e.g., full allotment
in tender procedures). This requires some caution in interpreting results, as outlined also in At-Sahalia et al. (2010, 2012). In
their opinion, market response to policy announcements is state
contingent, i.e., conditional to the state of the economy and nancial markets in which investors interpret them. Even though an
event study is unable to fully control for any macroeconomic
or structural factor that may affect market response, the problem may be reduced by splitting the investigated time period in
several sub-periods. Following this suggestion, we run our event
study over three different stages of the recent crisis, identied
on the basis of major events that strongly affected nancial markets: the subprime crisis, the global crisis, and the sovereign debt
crisis.
4.1. Estimating variations in the LIBOR-OIS spread

The LIBOR-OIS spread8 became a widely monitored indicator of nancial distress (Taylor and Williams, 2009) and a useful
measure of the effectiveness of policy interventions.9 In times
of sufcient liquidity and in the absence of market dislocations,
the LIBOR-OIS spread is close to equilibrium, which periodically
is disturbed from external events. For instance, when markets are under stress, as in the fall of 2007, uncertainty about
credit and liquidity risk creates an opportunity cost for term
funding, resulting in a signicant increase in most major currencies.
We dene the spread between the term rate and the OIS rate
(n)
as follows. Let it denote the three-month LIBOR reported by the
British Bankers Association approximately 6:00 a.m. Eastern Time
(n)
on date t + 1, for the country/cross n and st the three-month OIS
8
The LIBOR xing is meant to capture the rates paid on unsecured interbank
deposits at large and internationally active banks (McAndrews et al., 2008). The
Overnight Index Swap (OIS) rate is a measure of the expectation of the average
overnight rates over a specic term of secured transactions. The OIS rate is closely
connected to the average overnight interest rate expected to prevail over the next
n days. An OIS is structured as follows: at maturity, the parties exchange the difference between the interest that would be accrued from repeatedly rolling over an
investment in the overnight market and the interest that would be accrued at the
agreed OIS xed rate (Taylor and Williams, 2009).
9
The LIBOR-OIS spread is a widely monitored indicator of nancial distress
(Taylor and Williams, 2009), but it may not be an exclusive proxy for nancial
distress. However, At-Sahalia et al. (2012) documented that their ndings using
the LIBOR-OIS spread are consistent with those obtained using various measures
of nancial distress as the three-month New York Funding Rate (NYFR), the spread
between the LIBOR rate and the risk-free rate (the TED spread), the forward-looking
LIBOR-OIS spread using futures contracts at one-year maturity, the spread between
government bond repo rates and the corresponding risk-free rate, composite bank
CDS spreads, equity price and volatility indices (VIX).
rate as reported at the close (Eastern Time) of date t. The spread

between the LIBOR and OIS rate is dened as follows:
(n)
Sn,t = it
(n)
st
(1)
The LIBOR-OIS spread rose substantially for the U.S. in early

October 2008 and then fell sharply during the beginning of 2009.
This trend appears quite similar to other countries. There is evidence of quite a different situation in Switzerland, however, a
currency area where the 3-month LIBOR is the reference rate for
the monetary policy. In this case, the LIBOR is mainly driven by
monetary decisions made by authorities, rather than by market
forces. As a consequence, when we report results for the effect of
monetary announcements on the LIBOR-OIS spread, we remove the
case of Switzerland, a country that will be considered only for the
analyses regarding equity indices and G-SIFIs.10
We estimate the spread between the LIBOR and OIS over four
event windows [i.e., (0,0), (0,+1), (1,+1), and (1,+3)] corresponding to one, two, three and ve day intervals. We test the null
hypothesis that the spread level related to an event announcement
is equal to zero, and therefore, it concerns the average effect of
an event on the spread. According to At-Sahalia et al. (2012), the
parametric test statistic is a t-statistic that considers the historical volatility of the LIBOR-OIS spread over an estimation period
of 20 days preceding the event window. This allows us to restrict
the statistical signicance only to those observations that are truly
exceptional in terms of large changes in the LIBOR-OIS spread prior
to the policy event.
We dene as abnormal all the differences occurring in the
LIBOR-OIS spread related to a policy announcement event with
respect to the expected daily change. The expected daily change of
the market indicator is estimated as the average daily change over
the previous 20 working days and is subtracted from the actual
daily change on each day of the event window to obtain abnormal
differences.
Abnormal differences are generally dened as the daily changes
AD = (xi,,m xi,1,m ) of a market variable x in response to policy announcement i of category m on event time day where
[d1,d2] with d2 > d1 and d1 corresponds to the initial day of
the event window and d2 corresponds to the nal day of the event
window. For instance, [1,3] denotes a day within the event
window (with the event occurring at = 0), and T = 5 denotes the
total length of the event window of 5 days.
As in At-Sahalia et al. (2012), we apply parametric tests of
means before and after announcements to abnormal differences
to ascertain whether the announcement induces a statistically signicant effect on interbank risk premia. The estimator of volatility
is based on the expected prediction error that is derived from a
simple autoregressive process and is adjusted by the ratio between
volatility during both the estimation window and the event window. This accounts for changes in volatility on a day-to-day basis
relative to the empirical experience within a short event window.
Such specication is particularly relevant for cases when a policy
measure is anticipated by markets and has an effect on the LIBOROIS spread before the event window. To calculate this test statistic,
we rst derive a measure of the standard deviation:
i,,l,m

1

=
var(i,l ) 1 + +
L
10
(ADi, ADi,l )
l L (ADi, ADi,l )
0
L2
We thank one of the referees for suggesting this point.
2
2
student
(2)
where i indicates the announcement, is a day within the event

window, l is a day within the pre-event estimation period, m is
the type of monetary policy intervention, i,l denotes the ordinary prediction error of the AR(1) process of the LIBR-OIS spread
at rst difference subject, L denotes the total length of the preevent estimation window. We estimate i,,l,m by performing an
auto-regression in a sample period of 20 days, according to the
estimated period of the different sample measures adopted in the
test procedure.
Following Brown and Warner (1985), we estimate the (daily)
standardized prediction error (SPE) as follows:

ADi,
1
SPEi,,l,m =
T i,,m
T +1
(3)
We then derive the average standardized interval prediction

error (ASIPE) to compute our test statistic as follows:
Z=
Zm
Nm
i Nm
SPEi,,m
(0, 1)
G(0, x , x )
(4)
This test statistic asymptotically converges to the standard

normal distribution (.) (At-Sahalia et al., 2012). Given the test
for spread, the statistical signicance of the event period excess
returns is assessed for each sub-sample, country and time period
considered.
We perform a consistency test to check for outliers. Our test is
run both on CAAR and Z-stat and determines whether each observation of both distributions of CAAR (stated as X) and the SPE statistic
(stated as T), as yielded by Eq. (4), is an outlier according to the
following formula:
Ox,T =
55
Table 3
Global systemically important nancial institutions. This table reports the list of
the global systemically important nancial institutions (G-SIFIs) released by the
Financial Stability Board on the 4th November 2011. From the original list of 29
banks, we exclude the Bank of China and Bank of Nordea because they are not based
in one of the ve currency areas investigated.
Bank name
Currency area
CREDIT SUISSE
UBS
BANQUE POPULAIRE CdE
BNP PARIBAS
COMMERZBANK
DEUTSCHE BANK
DEXIA
GROUP CREDIT AGRICOLE
ING BANK
SANTANDER
SOCIETE GENERALE
UNICREDIT GROUP
MITSUBISHI UFJ FG
MIZUHO FG
SUMITOMO MITSUI FG
BARCLAYS
HSBC
LLOYDS BANKING GROUP
ROYAL BANK OF SCOTLAND
BANK OF AMERICA
BANK OF NEW YORK MELLON
CITIGROUP
GOLDMAN SACHS
JP MORGAN CHASE
MORGAN STANLEY
STATE STREET
WELLS FARGO
Switzerland
Switzerland
Euro Area
Euro Area
Euro Area
Euro Area
Euro Area
Euro Area
Euro Area
Euro Area
Euro Area
Euro Area
Japan
Japan
Japan
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United States
United States
United States
United States
United States
United States
United States
United States
Source: Financial Stability Board (2011).
if Abs (Max(X) > Abs (Min(X) and Abs (Max(X) > 10 Abs(Min(X) then O = Outliers
x,
if Abs (Max(X) < Abs (Min(X) and Abs (Max(X) < 10 Abs(Min(X) then Ox, = Outliers
or
if Abs (Max(T ) > Abs (Min(T ) and Abs (Max(T ) > 10 Abs(Min(T ) then Ot, = Outliers
if Abs (Max(T ) < Abs (Min(T ) and Abs (Max(T ) < 10 Abs(Min(T ) then Ot, = Outliers
(5)
otherwise Ox,T =
/ Outliers
4.2. Estimating abnormal returns

We measure the market reaction following the monetary policy intervention at two different levels. Specically, we estimate
abnormal returns (ARs), which are the forecast errors of a specic
normal return-generating mode, focusing on equity indices (capturing the stock market in each monetary area) and stock returns
for each G-SIFI.11
Regarding the stock markets, we select ve indices (MSCI
Switzerland, MSCI Japan, MSCI EMU, MSCI UK and MSCI USA) as
a proxy for stock market returns for the ve monetary areas investigated (Switzerland, Japan, the Euro area, the UK and the U.S.). As
a result, we have one observation for each press release regarding
monetary policy intervention, resulting in 419 total observations.
For joint announcements by two or more different central banks,
we measure the reaction in every country involved in the intervention. For example, if the ECB, the Bank of England and the Federal
Reserve declare to start a new foreign swap agreement, we measure
the reaction in all three currency areas. As a result, we have 35
11
From the G-SIFIs list released by the Financial Stability Board on 4th November
2011, we exclude the Bank of China and Bank of Nordea as they are not based in one
of the ve currency areas investigated.
joint communications in our sample and 106 observations in our

event study.
Regarding G-SIFIs, we select stock price time-series for each of
the 27 G-SIFIs. For both single and joint communications, we measure the reaction of each G-SIFI based in a currency area involved in
the intervention. For example, with reference to all interventions
initiated by the Swiss National Bank, alone or together with other
central banks, we measure the impact on UBS and Credit Suisse,
which are the only two G-SIFIs based in Switzerland. A list of the
G-SIFIs with their currency area of reference is presented in Table 3.
Running the event study on single G-SIFIs, we must address the
problem of possible overlapping relevant events involving these
banks. Using the database compiled by At-Sahalia et al. (2010,
2012) and the database Factiva, we check each bank for all the
investigated periods, and we exclude a monetary policy announcement from the event study relative to the bank if it falls in a
window of (15,+15) around another relevant event for that bank.
For example, on 30/09/2008, Dexia was rescued by the governments of Belgium, France and Luxembourg. Therefore, when we
valued the response for the Dexia stock price, we dropped all monetary policy announcements between 15/09/2008 and 15/10/2008.
To overcome the problem of other possible events regarding single
banks, we drop from the analysis those values in the 1st and the
99th percentiles with respect to abnormal returns (ARs).
56
Regarding the estimation procedure, we estimate the AR using

the market model (MacKinlay, 1997). Normal returns for every i-th
observation (Rit ) that is the broad equity index or a single bank
index are obtained as a function of the market portfolio return
(RMt ):
Rit = i + i RMt + it
E(it ) = 0,
var(it = 2i )
(6)
Market model parameters are obtained with daily log returns of

currency area/G-SIFIs and a broad world equity index that represents the market portfolio over a 252-day estimation period, ending
20 days before the announcement. ARs are then obtained as the difference between the actual stock return and the return predicted
by the market model:
i RMt )
ARit = Rit (
i +
(7)
ARs are cumulated over a period of time (cumulative abnormal

return, CAR) around the announcement date (t = 0). Following AtSahalia et al. (2010, 2012), we focus on the following short event
windows: 5-day (1; +3), 3-day (1; +1) and one-day (0;0). As a
robustness check, we also estimate CARs for (0;+1) (2;+2) and
(3;+3). For each event window, CARs are obtained as follows:
CARi (t1 , t2 ) =
t2

ARit
(8)
t=t1
where t1 and t2 are the start and the end dates of the considered
window. ARs can be aggregated on a time or a cross-section basis
for a portfolio of N observations. The cumulative average abnormal
return (CAAR) is calculated as:
1
CARi (t1 , t2 )
N
N
CAAR(t1 , t2 ) =
(9)
i=1
After the calculation of the CAARs, we test the hypothesis of

a market reaction signicantly different from zero. As noted in
Cummins and Weiss (2004), various studies have documented a
variance increase in ARs during the days near the event, with
respect to the estimation period, as an effect of the announcement.
If hypothesis testing is conducted without considering this increase
in variance, results may be biased in the direction of a frequent
rejection of the null hypothesis in favor of the alternative. To overcome this limitation and to avoid considering as signicant a null
value creation or destruction, we follow the approach rst proposed by Mikkelson and Partch (1988) and then adopted in recent
studies (e.g., Harrington and Shrider, 2007; Mentz and Schierek,
2008). Thus, we use the Boehmer et al. (1991) test statistic. First,
we calculate a standardization factor:
SRi =
Ts +
i
(Ts2 /T )
t2
CARi (t1 , t2 )
t=t1
T
(RMt Ts (R M )) /
t=l
(RMt R M )
(10)
where i is the standard deviation of abnormal returns estimated

with the market model; Ts is the number of days in the considered
event window (t1 , t2 ); T is the number of days in the estimation
period; RM is the market portfolio return and R M is the average market portfolio return during the estimation period. The Z statistic,
with a t-distribution with T-2 degrees of freedom and converging
to a unit normal, is determined as follows (Mentz and Schiereck,
2008, p. 207):
Z=
1/N
N
N
1/N(N 1)
i=l
i=l
SRi
SRi
N
i=l
2
(11)
SRi /N
A recent study by Kolari and Pynnnen (2010) proposes a new

test statistic that modies the one suggested by Boehmer et al.
(1991) to consider possible cross-sectional correlations among

abnormal returns. The adjusted test statistic is obtained applying
the following correction factor to the previously dened Z:
1 r
1 + (N 1)r
(12)
where r is the average of the sample cross-correlations of the estimation period residuals and N is the number of observations in the
considered sample.
5. Results and discussion
In this section, we present and discuss our empirical ndings.
As outlined in Section 4, the event study is not able to isolate the
effectiveness of a measure stand-alone, but allows us to measure
its impact conditional on the state of the economy and the implementation of other policy interventions. Our main focus is on the
estimation and comparison of the average conditional market reaction at three different levels. These levels are the interbank credit
and liquidity risk premia (Section 5.1), the stock market in each
monetary area (Section 5.2) and the stock returns on the 27 G-SIFIs
(Section 5.3).
5.1. The impact of monetary policy interventions on the
interbank credit market and liquidity premia
The effect of policy interventions on the LIBOR-OIS spread of
the full-time sample varies according to single policy measures
and estimation windows. The results in Table 4, Panel A show the
impact of several expansionary and inaction/restrictive measures
on the LIBOR-OIS spread.
A rst evidence regards the effect of policy interventions
focused on interest rates. As expected, interest rate cuts (IR CUT)
are generally associated with a reduction in the LIBOR-OIS spread
(statistically signicant at the 1% condence level in the ve-day,
two-day and three-day event windows), while the decision to
increase or leave policy rates unchanged leads to an increase (statistically signicant at the 1% condence level in all event windows).
These ndings are consistent with those of At-Sahalia et al. (2012),
indicating that interest rate decisions were effective in reducing the
credit and liquidity risks perceived in the interbank market over the
nancial crisis period.
Examining the non-conventional expansionary measures, i.e.,
liquidity provision in domestic currency (LIQ+) and monetary
easing (MON EASE), the LIBOR-OIS spread reaction is smaller
in magnitude and without a clear direction. Liquidity drain or
end/reduction in monetary easing programs (CONTR) are also not
signicantly different from zero. These results, which are consistent with At-Sahalia et al. (2012), highlight that the effect
of non-conventional monetary policy measures on the interbank
market is more difcult to discern with respect to interest rate
decisions.
The effect of monetary policy interventions is disentangled for
the three stages of the nancial crisis in Table 4, Panel B. Expansionary measures generally produce a spread reduction, especially
during the subprime and global nancial crisis.
There are two counterintuitive ndings concerning small positive and signicant CAARs in the two-day event window for both
the rst and the last crisis periods. However, it should be noted
that their order of magnitude is extremely small with respect to
the CAARs with an expected negative sign. While this can easily happen when the sample size is not very large, statistics very
small in magnitude may present a different sign from that which is
expected.
57
Table 4
The LIBOR-OIS spread response to single central banks announcements. This table reports the test statistics of cumulative abnormal returns estimated over various event
windows for 419 monetary policy interventions from single central banks between June 2007 and June 2012. Figures are computed keeping out Swiss National Bank
monetary policy interventions and those violating constraints according to conditions (5). The impact of the interventions is estimated focusing on the difference between
LIBOR and OIS rates. The statistical signicance of cumulative average abnormal returns is tested using Brown and Warner (1985) as implemented in At-Sahalia et al.
(2012). IR CUT indicates interest rate cuts; IR UNC/INCR indicates interest rates increased or unchanged; MON EASE indicates monetary easing intervention; LIQ+ indicates
liquidity provision in both domestic or foreign currencies; CONTR indicates liquidity drain or end/reduction in monetary easing programs; EXP MP indicates expansionary
monetary policy measures and INA RESTR monetary policy action or restrictive measures. Subprime crisis: 1st June 2007 to 14th September 2008. Global nancial crisis:
15th September 2008 20 1st May 2010. Sovereign debt crisis: 2nd May 2010 to 30th June 2012.
EXP MP (198 obs)
IR CUT
CAAR
INA RES (188 obs)

LIQ+
Z-stat
MON EASE
CAAR
Z-stat
CAAR
Panel A expansionary (EXP MP) vs. policy inaction and restrictive measures (INA RES)
0.064
7.795***
0.000
18.219***
0.006
(1,+3)
(1,+1)
0.026
10.198***
0.001
9.730***
0.001
(0,+1)
0.037
7.895***
0.003
10.082***
0.000
(0,0)
0.046
23.766***
0.001
1.749**
0.000
CONTR
IR UNC/INCR
Z-stat
CAAR
Z-stat
CAAR
Z-stat
1.542**
0.610
0.833
0.708
0.004
0.002
0.003
0.002
0.684
1.232
1.123
1.285*
0.003
0.003
0.002
0.001
17.954***
8.953***
8.237***
4.185***
Panel B the effect of a monetary policy in three different stages of nancial crisis
Subprime crisis (35 obs)
CAAR
Expansionary measures, EXP MP
(1,+3)
0.012
0.022
(1,+1)
0.002
(0,+1)
(0,0)
0.001
Global nancial crisis (111 obs)
Sovereign debt crisis (52 obs)
Z-stat
CAAR
Z-stat
CAAR
Z-stat
4.537***
2.649***
1.443*
0.669
0.022
0.004
0.005
0.003
4.363***
1.011
0.301
0.694
0.001
0.003
0.004
0.003
0.0801
0.898
1.594*
0.756
Subprime crisis (44 obs)

CAAR
Policy inaction and restrictive measures, INA RES
(1,+3)
0.008
(1,+1)
0.000
(0,+1)
0.000
(0,0)
0.002
Global nancial crisis (54 obs)
Sovereign debt crisis (90 obs)
Z-stat
CAAR
Z-stat
CAAR
Z-stat
1.011
4.953***
6.929***
2.564***
0.004
0.005
0.001
0.002
0.614
2.472***
0.699
1.536*
0.001
0.002
0.001
0.001
6.135***
2.440***
2.531***
1.280
Source: Authors elaboration on European Central Bank, Bank of Japan, Bank of England, and Federal Reserve institutional websites; At-Sahalia et al. (2010, 2012). Source of
nancial data: Datastream and Reuters.
*
Estimates are statistically signicant at the 10% level.
**
***
With respect to policy inaction and restrictive measures, we

generally nd the expected result of a rise in the LIBOR-OIS spread,
except for the global nancial crisis period. This nding is most
likely due to the different reactions to the OIS rate compared to the
LIBOR rate as conrmed by an analysis of variance (ANOVA) for this
particular period, thus revealing that the OIS rate is characterized
by a higher volatility with respect to the LIBOR rate.
5.2. The impact of monetary policy interventions on stock
markets
By running an event study, we estimate CARs to assess the effect
of monetary policy interventions focusing on the stock market
indices (MSCI Switzerland, MSCI Japan, MSCI EMU, MSCI UK and
MSCI USA) of the interested currency areas (Switzerland, Japan,
the Euro, the UK and the U.S.).
Panel A of Table 5 reports the CARs by distinguishing expansionary measures and policy inaction and restrictive measures. As
expected, we observe that there are, on average, positive CARs
around expansionary monetary policy actions. We nd that the
mean CARs for expansionary measures (EXP MP) are positive and
statistically signicant (at the 10% condence level or less) for the
event windows (1,+3) and (3,+3). Conversely, mean CARs for
policy inaction and restrictive measures (INA RES) are negative
and statistically signicant (at the 5% condence level or less) for
the event windows (1,+1) and (0,+1). These results are strongly
consistent with the expectation that monetary expansionary measures have a positive effect on stock markets, while policy inaction
and restrictive measures have a negative effect on stock markets.
Interestingly, we observe that the stock market response is statistically signicant 3 days after the announcement (not earlier) for
expansionary measures and 1 day after (not later) for restrictive
and policy inaction measures.
Focusing on the effect of different monetary policy interventions (Panel B in Table 5), we show that interest rate cuts (IR CUT)
do not produce a statistically signicant (at the 10% condence
level or less) effect on the stock markets. Conversely, we observe
negative CARs around the announcement of interest rate increases
and when interest rates remain unchanged (IR UNC/INC) in the
event windows (1,+1) and (0,+1). We also nd that monetary
easing (MON EASE) does not produce a statistically signicant
stock market reaction. We nd that CARs are positive and statistically signicant (at the 10% condence level or less) around the
announcement of liquidity provisions (LIQ+) in all event windows
estimated. Conversely, we nd that liquidity drain or end/reduction
in monetary easing programs (CONTR) are not associated with statistically signicant stock market reactions. Overall, we nd that
central banks decisions to change interest rates produce a statistically signicant market reaction only in the case of unchanging or
increasing interest rates, but not in interest rate reductions. Central banks interventions on liquidity are effective only in the case of
liquidity provisions, not in the case of reductions. When examining
58
Table 5
Stock Market response to single central banks interventions. This table reports the descriptive statistics of cumulative abnormal returns estimated over various event windows
for 419 monetary policy interventions from single central banks between June 2007 and June 2012. The impact of the 419 interventions is estimated for the stock market of
the interested currency area, resulting in 419 total observations. Daily abnormal returns are obtained using the market model with a 252-day estimation period. The market
portfolio is represented by the MSCI World Indices. The stock market in each currency area is represented by the MSCI equity indices for EMU, Japan, Switzerland, the UK and
the US. The statistical signicance of cumulative average abnormal returns (CAAR) is tested using the Boehmer et al. (1991) procedure to capture the event-induced increase
in returns volatility with the adjustment suggested in Kolari and Pynnnen (2010) to account for possible cross-sectional correlations of abnormal returns. IR CUT indicates
interest rate cuts; IR UNC/INCR indicates interest rates increased or unchanged; MON EASE indicates monetary easing intervention; LIQ+ indicates liquidity provision, in both
domestic or foreign currencies; CONTR indicates liquidity drain or end/reduction in monetary easing programs; EXP MP indicates expansionary monetary policy measures
and INA RESTR monetary policy inaction or restrictive measures. Subprime crisis: 1st June 2007 to 14th September 2008. Global nancial crisis: 15th September 2008 to 1st
May 2010. Sovereign debt crisis: 2nd May 2010 to 30th June 2012.
EXP MP (212 obs)
INA RES (207 obs)
CAAR
Z-stat
(1,+3)
0.36%
2.4928**
(1,+1)
0.07%
0.7980
(0,+1)
0.05%
0.4909
(0,0)
0.15%
1.1842
(3,+3)
0.35%
1.9017*
0.21%
1.6359
(2,+2)
IR CUT (38 obs)
CAAR
Z-stat
CAAR
Z-stat
0.01%
0.22%
0.19%
0.02%
0.02%
0.06%
0.3336
2.3530**
2.2063**
0.1174
0.2272
0.2051
LIQ+ (126 obs)
MON EASE (48 obs)
CONTR (27 obs)
IR UNC/INCR (180 obs)
CAAR
Z-stat
CAAR
Z-stat
CAAR
Z-stat
CAAR
Z-stat
3.855***
1.718*
1.904*
2.007**
2.682***
3.256***
0.05%
0.26%
0.01%
0.21%
0.12%
0.32%
0.1627
0.2265
0.0276
0.6030
0.1167
0.4488
0.00%
0.04%
0.04%
0.04%
0.11%
0.01%
0.1775
0.1514
0.5167
0.0016
0.1085
0.1251
0.02%
0.25%
0.21%
0.02%
0.04%
0.07%
0.2806
2.3401**
2.0511**
0.1177
0.1944
0.2386
Panel B Interest Rates, Liquidity and Monetary Easing Decisions

0.33%
0.3414
0.52%
(1,+3)
0.01%
0.0481
0.21%
(1,+1)
(0,+1)
0.47%
1.4833
0.23%
(0,0)
0.20%
0.6628
0.24%
(3,+3)
0.65%
0.8251
0.44%
0.11%
0.0841
0.44%
(2,+2)
Expansionary Measures, EXP MP
Policy Inaction and Restrictive Measures, INA RES
Subprime crisis (37

obs)

(120 obs)

(55 obs)
Subprime crisis (49

obs)

(59 obs)

(99 obs)
CAAR
CAAR
CAAR
CAAR
Z-stat
CAAR
Z-stat
CAAR
Z-stat
0.02%
0.22%
0.20%
0.15%
0.39%
0.15%
0.1209
0.7160
0.8308
0.6325
1.2078
0.5689
0.12%
0.22%
0.23%
0.04%
0.02%
0.20%
0.8291
0.6924
0.6988
0.2061
0.0584
0.7244
0.03%
0.22%
0.16%
0.02%
0.13%
0.08%
0.203
2.442**
2.192**
0.657
0.794
0.313
Z-stat
Z-stat
Z-stat
Panel C the effect of monetary policy in three different stages of nancial crisis
(1,+3)
0.69%
3.2341***
0.37%
1.7247*
0.10%
0.2638
(1,+1)
0.62%
2.7597***
0.10%
0.4184
0.07%
0.0391
(0,+1)
0.30%
1.7034*
0.07%
0.3884
0.14%
0.3062
(0,0)
0.14%
1.0878
0.13%
0.3785
0.21%
0.8722
(3,+3)
0.51%
2.0894**
0.44%
1.8536*
0.04%
0.0667
(2,+2)
0.53%
2.5052**
0.17%
1.0371
0.07%
0.0066
(2010, 2012). Source of nancial data: Datastream and Reuters.
*
**
***
the magnitude of CARs, it is possible to observe that the most effective policy interventions were liquidity support decisions, showing
that non-conventional measures had, on average, a larger positive
impact on the stock market than traditional measures.
By distinguishing the three stages of the nancial crisis (Panel C
in Table 4), we nd that the expansionary interventions are positively and statistically signicant (at the 10% condence levels
or less) and are associated with mean positive CARs in most of
the event windows during the subprime crisis, and in the (1,+3)
and (3,+3) windows during the global nancial crisis. During the
sovereign debt crisis, we do not observe statistically signicant
(at the 10% condence level or less) CARs around expansionary
monetary policy announcements. We also nd that policy inaction and restrictive measures (INA RES) are not statistically related
to mean CARs either in the subprime or the global nancial crisis,
while we estimate statistically signicant (at the 10% condence
level or less) CARs 1-day around the announcement during the
sovereign debt crisis. Overall, we nd that expansionary measures,
but not policy inaction and restrictive measures, were effective during the subprime crisis and the global nancial crisis, while policy
inaction and restrictive measures, but not expansionary measures,

were effective during the sovereign debt crisis. It is also interesting to note that while during both the subprime and the global
crises, expansionary interventions were more frequent than inaction or restrictive ones, during the sovereign debt crisis the opposite
occurs. In all the investigated areas, monetary policy authorities
have revisited their strategy due to concerns about ination expectations and scal equilibria.
5.3. The impact of monetary policy interventions on
global-systemically important nancial institutions (G-SIFIs)
We now discuss the estimated CARs obtained by focusing on
stock prices of G-SIFIs and distinguishing between (1) expansionary
measures and (2) restrictive measures and policy inaction (Panel A
of Table 6). We show that there are positive mean CARs around
expansionary monetary policy interventions, and we nd that the
mean CARs for expansionary measures (EXP MP) are positive and
statistically signicant (at the 5% condence level or less) for the
event windows (1,+3) and (0,0). The estimated mean CARs for
59
Table 6
Market response of global systemically important nancial institutions (G-SIFIs) to single central banks interventions. This table reports the descriptive statistics of cumulative
abnormal returns estimated over various event windows for 419 monetary policy interventions from single central banks between June 2007 and June 2012. The impact of
the 419 announcements is estimated for the stock prices of all G-SIFIs based in that area resulting in 2253 total observations. Daily abnormal returns are obtained using the
market model with a 252-day estimation period. The market portfolio is represented by the MSCI World Indices. The statistical signicance of Cumulated Average Abnormal
Returns (CAAR) is tested using the Boehmer et al. (1991) procedure to capture the event-induced increase in returns volatility with the adjustment suggested in Kolari and
Pynnnen (2010) to account for possible cross-sectional correlations of abnormal returns. IR CUT indicates interest rate cuts; IR UNC/INCR indicates interest rates increased
or unchanged; MON EASE indicates monetary easing intervention; LIQ+ indicates liquidity provision, in both domestic or foreign currencies; CONTR indicates liquidity drain
or end/reduction in monetary easing programs; EXP MP indicates expansionary monetary policy measures and INA RESTR monetary policy inaction or restrictive measures.
Subprime crisis: 1st June 2007 to 14th September 2008. Global nancial crisis: 15th September 2008 to 1st May 2010. Sovereign debt crisis: 2nd May 2010 to 30th June 2012.
EXP MP (1133 obs)
INA RES (1120 obs)
CAAR
Z-stat
(1,+3)
0.74%
1.9877**
(1,+1)
0.28%
1.1234
0.24%
1.0825
(0,+1)
(0,0)
0.49%
2.6018***
(3,+3)
0.42%
1.2479
(2,+2)
0.21%
1.0996
IR CUT (162 obs)
LIQ+ (755 obs)
CAAR
CAAR
Z-stat
Z-stat
Panel B Interest Rates, Liquidity and Monetary Easing Decisions

(1,+3)
1.10%
0.4982
0.36%
1.339
(1,+1)
1.37%
1.0924
0.25%
0.163
0.88%
0.7473
0.18%
0.189
(0,+1)
1.06%
1.3111
0.02%
0.747
(0,0)
0.0609
0.15%
0.902
(3,+3)
0.10%
(2,+2)
0.88%
0.3497
0.13%
0.776
CAAR
Z-stat
0.69%
0.17%
0.05%
0.05%
0.23%
0.25%
2.0658**
0.6489
0.0293
0.2801
0.5034
0.7442
MON EASE (167 obs)
CONTR (201 obs)
IR UNC/INCR (919 obs)
CAAR
Z-stat
CAAR
Z-stat
CAAR
Z-stat
2.13%
1.58%
1.50%
2.25%
2.04%
1.09%
1.8985*
1.9332*
2.7028***
3.3428***
1.3723
0.7943
0.58%
0.35%
0.34%
0.34%
0.07%
0.24%
1.1816
1.1621
0.9856
0.8711
0.3664
0.5503
0.72%
0.13%
0.01%
0.14%
0.30%
0.25%
1.7513*
0.2636
0.4054
0.5688
0.3985
0.5847
Expansionary measures, EXP MP
Policy inaction and restrictive measures, INA RES
Subprime crisis (282

obs)

(581 obs)

(270 obs)
Subprime crisis (245

obs)

(316 obs)

(559 obs)
CAAR
CAAR
Z-stat
CAAR
Z-stat
CAAR
Z-stat
CAAR
Z-stat
CAAR
Z-stat
1.2478
0.5874
0.3892
1.2782
0.6172
0.0433
0.37%
0.55%
0.57%
0.47%
0.18%
0.26%
0.4738
0.9773
1.5659
1.3915
0.0398
0.2905
0.50%
0.04%
0.47%
0.12%
0.93%
0.56%
1.112
0.588
0.838
0.262
1.179
1.031
1.13%
0.30%
0.44%
0.09%
0.24%
0.21%
1.631
0.570
1.036
0.317
0.239
0.334
0.53%
0.15%
0.06%
0.10%
0.08%
0.13%
1.1731
0.1260
0.0103
0.4374
0.5067
0.0372
Z-stat
Panel C the three phases of the nancial crisis

1.17%
1.2333
0.70%
(1,+3)
(1,+1)
1.11%
1.3398
0.25%
(0,+1)
0.74%
0.8879
0.16%
(0,0)
0.49%
1.5255
0.49%
1.02%
1.0934
0.24%
(3,+3)
(2,+2)
1.08%
1.1727
0.25%
(2010, 2012). Source of nancial data: Datastream and Reuters.
*
**
***
policy inaction and restrictive measures (INA RES) are also positive
and statistically signicant (at the 1% condence level) for the event
windows (1,+3). While the results for expansionary interventions
are strongly consistent with those discussed for stock markets, and
they meet the expectation that monetary expansionary measures
have a positive effect on the economy (both stock markets and
systemically important banks), we nd that policy inaction and
restrictive interventions have a negative effect on stock markets
and a positive effect for systemically important banks for the event
windows (1,+3).
Focusing on the effect of different monetary policy interventions (Panel B in Table 6), we nd that interest rate cuts (IR CUT)
do not produce statistically signicant (at the 10% condence level
or less) effects on the stock prices of G-SIFIs. These results are
consistent with the ECB (2010, p. 62), thus suggesting that the
standard monetary policy measures, i.e., changes in the key interest
rates, could prove insufcient in ensuring the effective transmission of
monetary stance to banks and, subsequently, the real economy. We
also observe a positive CAR around the announcement of increased
or unchanged interest rates (IR UNC/INC) in the event windows
(1,+3). This result is perhaps because an increase in interest rates

implies higher interest margins for banks, which, in turn, produces
positive CARs for G-SIFIs, while such an increase has a negative
impact on the whole stock market. We nd that monetary easing (MON EASE) produces a statistically signicant stock market
reaction (at the 10% condence or less) for G-SIFIs for most of
the event windows. This result suggests that investors view central banks monetary easing interventions to be focused on banks
rather than considering them as expansionary interventions for the
whole stock market (as evidenced in Section 5.2, monetary easing did not produce a statistically signicant market response for
the whole stock market). Conversely, we nd that liquidity provision (LIQ + ) and liquidity drain or end/reduction (CONTR) are
not associated with statistically signicant stock price reactions for
G-SIFIs.
By distinguishing the three stages of the nancial crisis (Panel
C in Table 6), we do not nd statistically signicant evidence (at
the 10% condence level or less) that the expansionary or restrictive interventions are associated with mean CARs during the three
phases of the nancial crisis.
60
Table 7
Stock market response to coordinated central banks interventions. This table
reports the descriptive statistics of cumulated abnormal returns estimated over
various event windows for 35 monetary policy joint interventions from two or
more different central banks between June 2007 and June 2012. The impact of the
35 announcements is estimated for the stock market of the interested currency
areas (106 total observations) and for the stock prices of all G-SIFIs based in those
areas (518 total observations). Daily abnormal returns are obtained using the market model with a 252-day estimation period. The market portfolio is represented
by the MSCI World Indices. The stock market in each currency area is represented
by the MSCI equity indices for EMU, Japan, Switzerland, the UK and the US. The
statistical signicance of cumulative average abnormal returns is tested using the
Boehmer et al. (1991) procedure to capture the event-induced increase in returns
volatility with the adjustment suggested in Kolari and Pynnnen (2010) to account
for possible cross-sectional correlations of abnormal returns.
(1,+3)
(1,+1)
(0,+1)
(0,0)
(3,+3)
(2,+2)
Stock Market (106 obs)
G-SIFIs (518 obs)
CAAR
Z-stat
CAAR
Z-stat
0.32%
0.15%
0.20%
0.07%
0.30%
0.54%
1.895*
0.803
0.492
0.399
1.899*
2.393**
1.31%
0.51%
0.31%
0.12%
1.04%
0.97%
2.192**
1.371
1.385
1.144
1.375
1.962**
Source: Authors elaboration on European Central Bank, Bank of Japan, Bank of England, Federal Reserve and Swiss National Bank institutional websites; At-Sahalia
et al. (2010, 2012). Source of nancial data: Datastream and Reuters
*
**
6. The effectiveness of coordinated central banks

interventions
We focus now on estimated CARs around the announcement of
joint monetary actions made by two or more central banks. Such
actions are always in the form of swap arrangements for liquidity
provisions in foreign currencies. As shown in Table 7, with respect
to stock markets, we nd positive mean CARs in all event windows
that are statistically signicant at the 10% condence level or less
in (3; +3), (2; +2) and (1; +3). The reaction of G-SIFIs is quite
similar to the whole equity market effect, with a positive response
to monetary policy joint announcements such that the mean CAR
is positive for all the estimated event windows and statistically signicant at the 5% condence level for (1; +3) and (3; +3). Overall,
we nd that swap agreements between several central banks have
positive effects on investors when evaluating the perspectives of
both the economy as a whole and single systematically important
nancial institutions.
7. Conclusions
Our paper analyzes the market reaction to various monetary
policy interventions undertaken during the nancial crisis. Specifically, we selected a wide set of monetary policy measures enacted
between June 1st, 2007 and June 30th, 2012.
First, we measure the change in the three-month LIBOR-OIS
spread to replicate the study of At-Sahalia et al. (2012), estimating
the impact on interbank and liquidity risk premia over a longer time
interval (i.e., considering also the sovereign debt crisis). With reference to the LIBOR-OIS spread, our ndings substantially conrm the
nding of At-Sahalia et al. (2012). That is, while policy rates were
effective tool during the nancial crisis, it has been more difcult
to assess the impact of non-conventional measures. Furthermore,
when we focus on stock markets, we nd quite different results.
We show that monetary expansionary measures have a positive
effect on stock markets, while policy inaction and restrictive measures have a negative effect. Among the expansionary measures,
interest rate cuts and monetary easing actions do not produce a

statistically signicant effect on broad equity indices, while we nd
positive and statistically signicant CAARs around the announcement of liquidity provisions. Overall, we nd that central banks
decisions to change interest rates produce a statistically signicant market reaction only in the cases of unchanging or increasing
interest rates, not in decreasing interest rates. Furthermore, central banks interventions on liquidity are effective only in the
case of liquidity provisions, not in the case of reductions. By distinguishing the three stages of the nancial crisis, expansionary
measures (but not policy inaction or restrictive measures) are
found to be effective during the subprime crisis and the global
nancial crisis, while policy inaction and restrictive measures (but
not expansionary measures) are effective during the sovereign debt
crisis.
Overall, our results suggest that broad equity indices have beneted more from liquidity provision than from interest rate cuts.
There are several possible explanations for this nding. One possible explanation is that interest rates have progressively reached
levels near the zero lower bound, thereby restricting margins for
effective traditional interventions. Second, in a period where the
interbank market malfunctions or it is difcult to arrange funding for banks, liquidity injections may favor the extension of credit
to non-nancial rms in a more effective way than a decrease in
interest rates.
Finally, focusing on the effect of different monetary policy
announcements for the 27 worldwide G-SIFIs, we nd a strong positive reaction for monetary easing programs. Conversely, liquidity
provision (LIQ+) and liquidity drain or end/reduction (CONTR) are
not associated to statistically signicant stock price reactions for GSIFIs. These ndings are an indication that investors view central
banks monetary easing interventions as being focused on banks
rather than as an expansionary initiative for the whole economy.
In addition, observing that for single G-SIFIs the reaction is particularly strong and positive for monetary easing programs gives a
possible signal of their effectiveness in improving funding conditions for banks.
We acknowledge some limitations with our analysis that suggest some interesting directions for future research. First, we adopt
an event study methodology that has the advantages of simplicity
and parsimony as it is designed to work with a limited number of
observations and to avoid the problem of possible wrong regression model specication. Nevertheless, even though we apply some
criteria to address the problem of overlapping events, it is not
possible to completely exclude the presence of some confounding
effects. Because the number of monetary policy announcements
is signicantly large and, quite often, the same type of intervention is made in the same period in different countries, we do not
feel condent to assess spillover effects, even though we are aware
that this would be an important extension of the analysis by providing useful insights for the European debt crisis (e.g., how do
events in the Euro area affect other currency areas). This problem is augmented by the fact that we cover only monetary policy
decisions and do not consider the effect of other policy interventions (e.g., scal policy), which were also frequent throughout the
analyzed period. In addition, it may be interesting to investigate
whether the effect on G-SIFIs depends on some characteristics of
the bank, e.g., its capital strength or the composition of its liabilities. Further research should be conducted to enlarge the database
to other policy interventions and investigate the determinants of
the reaction by different G-SIFIs. In conclusion, we hope that this
study serves as a valid contribution to the literature on policy
response to the nancial crisis and contributes to a better understanding of the effect of various interventions on the nancial
market.
Acknowledgements
We would like to thank the two anonymous referees for providing us with very constructive suggestions. We would also like
to thank all participants at the 2013 International Conference on the
Global Financial Crisis in Southampton for their very useful comments. Franco Fiordelisi and Ornella Ricci also wish to gratefully
acknowledge the support of the Czech Science Foundation within
13-03783S Banking Sector and Monetary Policy:
the project GACR
Lessons from New EU Countries after Ten Years of Membership.
We alone are responsible for any remaining errors.
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Journal of Financial Stability 11 (2014) 4961

Contents lists available at ScienceDirect

Journal of Financial Stability

The effect of monetary policy interventions on interbank markets,

et al., 2010; Marqus-Ibnez

F. Fiordelisi et al. / Journal of Financial Stability 11 (2014) 4961

they intervened with a number of non-standard policy measures,

2. Past literature and contributions of the paper

F. Fiordelisi et al. / Journal of Financial Stability 11 (2014) 4961

Accordingly, our paper is the rst to focus on the nancial crisis

on both the perceived riskiness of certain assets (e.g., through an

F. Fiordelisi et al. / Journal of Financial Stability 11 (2014) 4961

13/10/2008 to improve liquidity in the short-term U.S. dollar funding market).

there is a decision to leave the current situation unchanged or to

announced decisions. Consistent with another criterion of ours, detail specications

F. Fiordelisi et al. / Journal of Financial Stability 11 (2014) 4961

Monetary easing decisions (49 obs) Liquidity decisions (187 obs)

Panel A sample description

Panel B classication of single monetary policy announcements

As a consequence, the short-run market response is suggestive of

effects between the impact of several measures announced in a

Panel A single announcements

Panel B joint announcements

Global nancial crisis

Sovereign debt crisis

Global nancial crisis

Sovereign debt crisis

F. Fiordelisi et al. / Journal of Financial Stability 11 (2014) 4961

4.1. Estimating variations in the LIBOR-OIS spread

rate as reported at the close (Eastern Time) of date t. The spread

The LIBOR-OIS spread rose substantially for the U.S. in early

We thank one of the referees for suggesting this point.

F. Fiordelisi et al. / Journal of Financial Stability 11 (2014) 4961

where i indicates the announcement, is a day within the event

We then derive the average standardized interval prediction

This test statistic asymptotically converges to the standard

Source: Financial Stability Board (2011).

4.2. Estimating abnormal returns

joint communications in our sample and 106 observations in our

F. Fiordelisi et al. / Journal of Financial Stability 11 (2014) 4961

Regarding the estimation procedure, we estimate the AR using

Market model parameters are obtained with daily log returns of

ARs are cumulated over a period of time (cumulative abnormal

After the calculation of the CAARs, we test the hypothesis of

where i is the standard deviation of abnormal returns estimated

A recent study by Kolari and Pynnnen (2010) proposes a new

(1991) to consider possible cross-sectional correlations among

F. Fiordelisi et al. / Journal of Financial Stability 11 (2014) 4961

INA RES (188 obs)

Global nancial crisis (111 obs)

Sovereign debt crisis (52 obs)

Subprime crisis (44 obs)

Global nancial crisis (54 obs)

Sovereign debt crisis (90 obs)

With respect to policy inaction and restrictive measures, we

F. Fiordelisi et al. / Journal of Financial Stability 11 (2014) 4961

INA RES (207 obs)

LIQ+ (126 obs)

MON EASE (48 obs)

CONTR (27 obs)

IR UNC/INCR (180 obs)

Panel B Interest Rates, Liquidity and Monetary Easing Decisions

Policy Inaction and Restrictive Measures, INA RES