4.3 Comparison of results between the period 1999-2014 and 2015-2019
4.3.2 Replication study
This subchapter shows the comparison of results for both even and odd weeks between the periods 1999-2014 and 2015-2019 using the methodology Cieslak et al. (2019) used in their study on U.S. stock returns following a FOMC meeting.
Figure 3 displays the average five-day excess return in relation to monetary policy decision by the ECB where the decision is made at day 0 during the period of 1999-2014. The graph shows no obvious pattern in the five-day excess returns. At the start of week -1 and until week 0 the five-day excess returns are approxmiately zero. The excess returns go down moving into week 0 but end at approximately zero at week 1. Moving through week 1 the five-day returns increase slightly but drop back again at the start of week 2. The returrns increase throughout the week almost linearly reaching 1% at the start of week 3. Following week 3 the returns drop again in a similar manner ending at 0% at the start of week 4. There is an increased volatility in five-day exceess returns moving through week 4 as returns go up to 0.5% and drop down to -1% over the next three days. The days between monetary policy decisions do not go beyond day 23 during the period of 1999-2014.
Figure 3: The average five-day excess returns of the FFE index over the T-bill rate during the period of 1999-2014. The vertical axis shows the five-day excess returns. The horizontal axis shows days relative to MPD where day 0 is the day of MPD, weekends are excluded. Five-day excess returns are calculated using Equation 20. Week -1 covers days -6 to -2, Week 0 covers days -1 to 3, week 1 covers days 4 to 8, week 2 covers days 9 to 13, week 3 covers days 14 to 18, week 4 covers days 19 to 23, week 5 covers days 24 to 28, week 6 covers days 29 to 33.
-1.50%
-1.00%
-0.50%
0.00%
0.50%
1.00%
1.50%
-6 -1 4 9 14 19 24 29
Five-day excess return
Days since a monetary policy decision by the ECB
32 Figure 4 displays the average five-day excess return for the period of 2015-2019. At the start of week -1 there is an average five-day excess return of close to 0.5% which lowers to approximately 0.25% at week 0. Week 0 has a slight increase in returns the first day of the week which goes down throughout the week ending at approximately -0.1% at week 1. Week 1 start with a drop moving through the first two days of the week where the five-day return then start to rise ending at 0% at week 2. Week 2 has a slight drop in returns on the first day increasing throughout the week to 0.2% at day 4 of week and dropping down to 0% at the start of week 3. The average five-day excess returns increase in week 3 where they go up to approximately 0.3% and stay at that rate over the next three days until the start of week 4.
The returns over week 4 drop down throughout the week from 0.3% at the start of week 4 down to approximately 0% at the start of week 5. The returns over week 5 are close to 0%
the first three days of the week from where the returns increase to approximately 0.2% over the next two days. There is a lot of volatility in the five-day excess returns in week 6 where they drop from 0.2% at the start of the week down to -2% over the next two days. The excess return rises again to -0.5% the next day and drops again down to -2% the following day.
There seems to be no obvious pattern in the average five-day excess return for neither the 1999-2014 or the 2015-2019 period.
33
Figure 4: The average five-day excess returns of the FFE index over the T-bill rate during the period of 2015-2019. The vertical axis shows the five-day excess returns. The horizontal axis shows days relative to MPD where day 0 is the day of MPD, weekends are excluded. Five-day excess returns are calculated using Equation 20. Week -1 covers days -6 to -2, Week 0 covers days -1 to 3, week 1 covers days 4 to 8, week 2 covers days 9 to 13, week 3 covers days 14 to 18, week 4 covers days 19 to 23, week 5 covers days 24 to 28, week 6 covers days 29 to 33.
Table 9 shows the results of robust regressions of daily excess returns of the Fama/French Europe index and dummy variables for even weeks. The beta coefficient over the period of 1999-2014 had a negative value for each even week period. Looking over the period of 2015-2019 the beta coefficients are all positive values except for the coefficient when the dummy is set as 1 on week 2. None of the beta coefficients were however significantly different from zero for neither period.
-2.500%
-2.000%
-1.500%
-1.000%
-0.500%
0.000%
0.500%
1.000%
-6 -1 4 9 14 19 24 29
Five-day excess return
Days since a monetary policy decision by the ECB
34
Table 9: Comparison of regression of daily excess returns on the Fama/French Europe Index over the T-bill rate on even weeks for the period of 1999-2014 and 2015-2019. (Robust t-statistic). * indicates significance at 10% level ** indicates significance at 5% level *** indicates significance at 1% level.
Dependent Variable: Excess Return on Stocks over T-bill 1999-2014
(1) (2) (3)
Dummy = 1 in Week 0, 2, 4, 6
-0.0357
(-0.89)
Dummy = 1 in Week 0
-0.0227 -0.0227
(-0.47) (-0.47)
Dummy = 1 in Week 2, 4, 6
-0.0536 (-0.99) Dummy = 1 in
Week 2
-0.0554 (-1.00) Dummy = 1 in
Week 4
-0.0105 (-0.05) Dummy = 1 in
Week 6
0 (.)
Constant 0.0370 0.0370 0.0370
(1.42) (1.42) (1.42)
N (days) 4136 4136 4136
Dependent Variable: Excess Return on Stocks over T-bill 2015-2019
(1) (2) (3)
Dummy = 1 in Week 0, 2, 4, 6
0.0171
(0.35)
Dummy = 1 in Week 0
0.0335 0.0335
(0.53) (0.53)
Dummy = 1 in Week 2, 4, 6
0.0875 (0.16) Dummy = 1 in
Week 2
-0.0286 (-0.40) Dummy = 1 in
Week 4
0.0481 (0.67) Dummy = 1 in
Week 6
0.0175 (0.06)
Constant 0.0185 0.0185 0.0185
(0.53) (0.53) (0.53)
N (days) 1294 1294 1294
35 Table 10 shows the comparison between the two periods of the regressions of the excess returns of the Fama/French Europe index on odd week dummy variables. Over the period of 1999-2014 all of the beta coefficients had a positive value on odd week periods. The period of 2015-2019 had negative beta coefficients for all odd week periods except for week -1 where the coefficient value is positive. There is however only one significant beta value over the two periods. The excess returns are 14.5 basis points higher on days that fall in week 3 over the period of 1999-2014 with a statistical significance of 5%.
36
Table 10: Comparison of regression of daily excess returns on the Fama/French Europe Index over the T-bill rate on odd weeks for the period of 1999-2014 and 2015-2019. (Robust t-statistic). * indicates significance at 10% level ** indicates significance at 5% level *** indicates significance at 1% level.
Dependent Variable: Excess Return on Stocks over T-bill 1999-2014
(1) (2) (3)
Dummy = 1 in Week -1, 1, 3, 5
0.0357
(0.89)
Dummy = 1 in Week -1
0.0310 0.0310
(0.63) (0.63)
Dummy = 1 in Week 1, 3, 5
0.0405 (0.87) Dummy = 1 in
Week 1
0.0310 (0.63) Dummy = 1 in
Week 3
0.145**
(2.20) Dummy = 1 in
Week 5
0 (.)
Constant 0.00133 0.00133 0.00133
(0.04) (0.04) (0.04)
N (days) 4136 4136 4136
Dependent Variable: Excess Return on Stocks over T-bill 2015-2019
(1) (2) (3)
Dummy = 1 in Week -1, 1, 3, 5
-0.0171
(-0.35)
Dummy = 1 in Week -1
0.0804 0.0804
(1.19) (1.19)
Dummy = 1 in Week 1, 3, 5
-0.0561 (-1.02) Dummy = 1 in
Week 1
-0.0626 (-0.92) Dummy = 1 in
Week 3
-0.0370 (-0.42) Dummy = 1 in
Week 5
-0.0786 (-0.89)
Constant 0.0356 0.0356 0.0356
(1.04) (1.04) (1.04)
N (days) 1294 1294 1294
37 The results of the comparison between the two periods do not indicate that there were significant changes in the stock returns in Europe when the ECB started to make monetary policy decisions every six weeks in 2015.
There is a change in the returns where the beta coefficient is negative during even weeks over the period of 1999-2014 and positive over the period of 2015-2019. The same can be said with the odd week beta coefficient which goes from positive to negative between the two investigated period. However, beside the week 3 coefficient over 1999-2014, none of the coefficients are significantly different from zero.