The Unassuming Economist

From a paper by Umberto Collodel and Vanessa Kunzmann:

“This paper investigates the transmission of monetary policy to financial markets within the Euro area, focusing on the role of uncertainty. While previous research has extensively examined the effects of changes in expected policy rates through event studies of European Central Banks (ECB) announcements, the impact of second moments and uncertainty has been far less explored. We address this gap by introducing a novel market-based measure of uncertainty regarding future interest rates, calculated as the difference in the standard deviation of Overnight Index Swap (OIS) rates in a three-day window around ECB policy announcements. Our findings reveal that ECB announcements generally increase market uncertainty about future interest rates, regardless of the sign of the policy surprise. This increased uncertainty significantly impacts asset prices, leading to higher nominal yields, lower stock market returns, and Euro appreciation against safe-haven currencies.”