Eurozone Stock Market Reactions to Unexpected ECB Monetary Policy Announcements

Jean-Yves Filbien1 Fabien Labondance2 Abstract:

To examine the Eurozone stock market reactions to European Central Bank (ECB) monetary policy announcement surprises, we study the effect of unexpected changes in the ECB's main refinancing rate on aggregate and sectoral Eurozone equity returns. We also analyse the results according to varying business conditions. We estimate unexpected changes on the basis of the market's expectations released in the financial press just before the monetary policy announcement. Using an event study methodology for the 1999-2008 period, we find that the impact of ECB monetary policy surprise is not significant for Eurozone stock markets. However, we find a significant stock market reaction around unexpected ECB monetary policy announcements when we account for business conditions and industry effects.

JEL Classification: E52, E58, G14 Keys Words: Monetary Policy, Stock Prices, Event Study, ECB

Jean-Yves Filbien, Louvain School of Management and FUCaM - Univ. Lille Nord de France - LSMRC, email: jean yves.filbien@fucam.ac.be, 151 chausse de Binche 7000 - Mons (Belgium) 2 Fabien Labondance (corresponding author), Louvain School of Management and FUCaM - Universit Grenoble II, email: fabien.labondance@fucam.ac.be We appreciate discussions with the participants of the 2009 Research Network Macroeconomics and Macroeconomic Policies Conference in Berlin; the 2009 Symposium on Money, Banking and Finance in Orlans; and the 2009 New Challenges to Central Banking in the Global Financial System Conference in Namur. We thank Natacha Gilson and Etienne Farvaque for many helpful comments. Remaining errors are ours.

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1 Introduction
In the Eurozone, maintaining price stability is the primary objective of the European Central Bank (ECB), though question of whether it should react to asset prices remains a topic of much debate. Yet this debate requires an accurate answer to a prerequisite question first: Does the ECB affect asset prices? An accurate understanding of the relationship between monetary policy and asset prices is important for analysing the ECB's monetary policy appropriately. We therefore empirically study the impact of unexpected ECB monetary policy announcement during 1999-2008 to estimate stock market reactions to monetary policy announcements and to examine the determinants of that impact. We consider an event period starting with the ECB creation until the recent financial crisis. In particular, we analyze how both aggregate and domestic Eurozone stock markets respond to monetary policy surprises. We then decompose our results according to business conditions and industry settings. Although we recognize that monetary policy surprises occur not only during central bank meeting but also in speeches given by members of central banks, these events are heterogeneous and generally wider in focus. Moreover, the ECB's communication on the monetary analysis does not play a major determinant of its actions, especially in ECB interest rate decisions (Berger et al., 2011). Thus, we concentrate on stock market reactions surrounding ECB monetary policy decisions and accordingly define a monetary policy announcement as the release of the main refinancing operations rate (MRO) by the Governing Council of ECB. We focus on these reactions because the MRO is the main instrument under control of Eurozone monetary policy makers. Furthermore, we distinguish expected and unexpected components of monetary policy announcements (Bernanke and Kuttner, 2005; Gurkaynak et al., 2005; Wongswan, 2009). That is, according to the semistrong efficiency hypothesis, stock prices reflect all publicly available information. Thus, the surprise of a monetary policy announcement conveys information to stock markets (Pearce and Roley, 1983). Prior literature indicates a negative and significant relation between unexpected monetary policy decisions and stock market performance (Bernanke and Kuttner, 2005). We estimate this unexpected component on the basis of the difference

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between the ECB monetary policy decision and the market's expectations, as released in the financial press just before the ECB monetary policy announcements. This study thus extends existing literature across several dimensions. First, we provide a new estimation of the unexpected monetary decisions component in a market's expectations, based on the reports in the financial press prior the monetary policy announcement. Second, we assess the impact of ECB monetary policy on stock returns, considering as well the aggregate and domestic stock markets that reect business conditions and industry settings. Third, though extensive research has investigated the impact of U.S. monetary policy on U.S. asset prices (Cook and Hahn, 1989; McQueen and Roley, 1993; Jensen and Johnson, 1995; Patelis, 1997; Kuttner, 2001; Bomm, 2003; Bernanke and Kuttner, 2005; Rigobon and Sack, 2004; Gurkaynak et al., 2005), to the best of our knowledge, few studies investigate how Eurozone stock markets react to ECB monetary policy decision surprises. We therefore focus specifically on Euro-zone stock markets. Fourth, we use a sample period that is much longer than those in previous studies. With these contributions, we derive several key results. First, we observe that the ECB's monetary policy decisions are often predictable and homogenous during the period as Diouf and Ppin (2010) also demonstrated it. Second, using an event study methodology, we find unexpected changes in ECB monetary policy that affect both aggregate and domestic Eurozone stock markets, mainly on the announcement date. Our results suggest that Eurozone stock markets do not react at ECB surprises over the three-day announcement period. Thus, the incorporation of changes in the ECB's MRO into Eurozone stock prices is quick. Third, we find no evidence of an inverse relationship between the abnormal returns of Eurozone stock indexes and MRO around an unexpected ECB monetary policy announcement. Fourth, when we decompose the stock market reaction according to business conditions, the results suggest that the influence of an unexpected ECB monetary policy is negative in bad times and positive in good times. Fifth, the unanticipated changes in the ECB main refinancing operations rates announcements have abnormal effects only for some sectorial stock indexes. The rest of this article is organized as follows: In Section 2, we review the previous literature and construct our testable hypotheses. In Section 3, we describe our data and present the methodology. In Section 4, we discuss the empirical results. Finally, we summarize our main 3
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conclusions in Section 5.

2 Literature and Hypotheses

According to the rich literature on monetary policy transmission, a change of the target rate affects the real economy (Bernanke and Blinder, 1992), through interest and wealth channels. Thus, the most direct and immediate impact of monetary policy decisions is the financial markets (Bernanke and Kuttner, 2005). We review the most important empirical studies related to the impact of monetary policy on the stock markets to formulate our hypotheses for empirical testing. Many researchers empirically address the question of the impact of monetary policy announcements on stock prices. Studies typically find an inverse relationship between stock prices and the target rate determined by central banks. For the 1977-1982 period, Pearce and Roley (1983) investigate the U.S. stock market response to weekly monetary announcements. They find that an unexpected increase in the announced money supply lowers stock prices, whereas an unexpected decrease reduces stock prices. For the period from September 1977 to October 1982, Pearce and Roley (1985) examine the daily reaction of U.S. stock prices to announcements about a broad set of macroeconomics news. Their result again suggests that stock prices affect unexpected monetary policy news. From January 1967 to December 1990, Thorbecke (1997) observes that an expansionary U.S. monetary policy increases ex-post U.S. stock returns by increasing expected cash ows or decreasing the discount factors. From June 1989 to December 2002 period, Bernanke and Kuttner (2005) reveal that on average, a hypothetical, unanticipated 25-basis point decrease in the Federal funds rate target would be associated with an approximately 1% increase in U.S. stock indexes. Bomfim (2003) indicates that for each basis point increase in the expected average daily values of the funds rate in the following month, daily stock market returns fall by 0.04 percentage points. Over a January 1994-November 2001 period, Rigobon and Sack (2004) find that an unanticipated 25-basis point increase in the U.S. short-term interest rate results in a 1.7% decline in the S&P index. Using intraday data during 1990-2004, Gurkaynak et al. (2005) find that, on average, a surprise 25-basis point tightening in the Federal funds rate leads to an approximately 1% significant fall in the S&P500. In the Eurozone, the results are more mixed though. Angeloni and Ehrmann (2003) analyse the effects of ECB monetary

surprises on domestic stock market indexes in Eurozone and discover that the impact of a monetary tightening is negative in all countries studied except Ireland. Bohl et al. (2008) assess the Eurozone stock market reactions to unexpected interest rate decisions by ECB and also find a negative and significant relationship between ECB monetary policy surprises and European stock market returns. However, Bredin et al. (2009) indicate that unexpected changes in German/Euro monetary policy have no impact on aggregate German stock market returns. Thus, from this literature, we formulate the following hypothesis: Hypothesis 1: We expect an inverse relationship between the ECB MRO and Eurozone stock markets returns around the monetary policy announcements. Previous studies also assume that investor reactions are similar across various economic states. However, we expect that the investor's behavior changes with business conditions. Analysing the daily changes in the S&P500 index over September 1977-May 1988, McQueen and Roley (1993) find that the S&P 500 index does not respond to certain economic information. Their results also are conditional on the business state, such that when the economy is strong, the stock market reacts negatively to news about higher real economic activity. McQueen and Roley explain this result according to the larger increase in the discount rates relative to expected cash flows. Moreover, Veronesi (1999) shows that the stock markets overreact to bad news in good times and underreact to good news in bad times. When business conditions are strong, a bad news increases the discount over expected cash flows, which reflects an attempt to bear the risk of higher uncertainty. Good news in bad times also tends to increase expected cash ows, but it also increases the discount investors demand to hold the asset. Funke and Matsuda (2006) thus analyze the impact of a broad set of macroeconomic news announcements on stock prices according to the conditions of economy. They find that the impact of the Fed target rates varies according to business cycles. When the economy is growing, a higher-than-expected Federal funds rate tends to lower stock prices. Higher interest rates also may have a direct impact on stock prices by reducing the value of discounted future earnings. When the economy is in recession though, an unexpected increase in the Federal funds rate tends to lead a rise in stock prices. Higher-than-expected interest rates may imply a better assessment by monetary authorities of the future outlook of the economy and thus, could induce expectations of greater growth. Recently, Jansen and Tsai (2010) observe that a surprise monetary policy affects larger the stock returns in a bear market than in a bull market. To

our knowledge, no studies consider the European stock market reactions according to business conditions. We thus separate the impact of the ECB monetary policy according to business conditions: Hypothesis 2.a: Unexpected surprises in ECB monetary policy announcements have a positive impact on aggregate Eurozone stock markets returns during good times. Hypothesis 2.b: Unexpected surprises in ECB monetary policy announcements have a negative impact on aggregate Eurozone stock markets returns during bad times. Most of these studies clearly focus on aggregate equity markets. That is, prior literature mostly neglects disaggregate levels, which could lead to asymmetric effects of monetary policies across industries. According to Krugman and Venables (1996), the integration of an economy promotes specialization patterns. Furthermore, we argue that a monetary policy shock could affect some industries. Carlino and Defina (1998) study the effects of monetary policy shocks across regions in the United-States. They find different responses, especially in manufacturing-intensive states. In Europe, Carlino and Defina (2000) find that heterogeneities among Eurozone countries relate significantly to their sectoral structures. In Germany, Hayo and Uhlenbrock (2000) show that German Lander are asymmetrically influenced by monetary shocks because of the many large differences in their regional industry portfolios. Bredin et al. (2009) moreover find that unexpected U.K. monetary policies have a significant negative impact on U.K. industry-level returns. However, these latter authors do not observe a significant influence of German/Eurozone monetary policy surprises on sectoral German indexes. Taking into account the characteristics in European economies, we anticipate: Hypothesis 3: The effect of the ECB's main refinancing operations rate announcements varies across industry.

3 Data and Methodology

To test our hypothesis, we employ an event study. Therefore we begin by describing our data, then present our methodology. 3.1 Data 3.1.1 Sample 6

We collect all ECB announcements about the MRO during the ECB Council of Governors meetings from January 1, 1999, to December 31, 2008, using the event dates listed on the ECB website. Our sample covers 157 events. As Table 1 reveals with regard to the frequency of ECB monetary policy announcements, we observe 16 increases and 11 decreases in the MRO. 3.1.2 Measuring Unexpected Monetary Policy Announcements We define the unexpected component of MRO announcements according to the difference between European ECB watchers consensus, released in the financial press just before the ECB Board of Governors' meetings, and the decisions of the ECB (Pearce and Roley, 1983, 1985; Bohl et al., 2008; Gkougkousi and Rossenboom, 2010). We obtain European analysts' expectations from research published in Financial Times, Table 1 : Distribution of the Change in ECB Main Refinancing Operations rates Announcements
This table presents the annual frequency of the change in ECB main refinancing operations rates announcements between 1999 and 2008

Les Echos, and the La Tribune, using Factiva 3 . Our estimate of unexpected ECB monetary announcement includes the sign of the surprise and its degree. The sign of the unexpected ECB MRO reflects the difference between the sign of the change in the ECB MRO and that expected by the analysts. The degree of unexpected ECB MRO instead indicates the
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Factiva is a database providing a world-wide press content.

difference between the degree of the change in the ECB MRO and that expected by analysts. For example, on April 4, 1999, the ECB lowered the MRO from 3.00% to 2.50%, whereas the market expected a decrease of 25 basis points. We therefore identify an unexpected ECB monetary policy announcement in degree but not in sign. In Tables 2 and 3, we provide the occurrence matrix of the sign and the degree of unexpected changes in ECB MRO. We have 17 and 11 unexpected ECB monetary policy announcements according to the sign and the degree, respectively. Therefore, it appears that the ECB monetary policy decisions are well anticipated by analysts. In Table 4, we also present the distribution of the sign and the degree of unexpected ECB MRO over the study period. We argue that these data imply the ECB has successfully communicated its monetary policy, especially in the recent years (Rosa and Verga, 2007). Table 2 : Sign of Unexpected Changes in ECB Main Refinancing Operations Rates Announcements Matrix
This table presents the frequency of unexpected signs of the ECB main refinancing operations rates announcements. We present the expected sign of the change in the ECB main refinancing operation rates just prior to the monetary policy announcement in the columns and the sign of the change in the ECB main refinancing operation rates in the rows.

Table 3 : Degree of Unexpected Changes in ECB Main Refinancing Operations Rates Announcements Matrix
This table presents the frequency of the unexpected degree of the ECB main refinancing operations rates announcements. We present the expected degree of the change in the ECB main refinancing operation rates just prior to the monetary policy announcement in the columns and the degree of the change in the ECB main refinancing operation rates in the rows.

Table 4 : Distribution of Unexpected Changes in ECB Main Refinancing Operations Rates Announcements
This table presents the annual frequency of the unexpected sign and the degree of the changes in the ECB main refinancing operations rates announcements.

3.2 Methodology 3.2.1 Stock Prices Indexes We focus on stock markets because they are among the most liquid asset markets in the Eurozone. We use daily stock market index prices from Datastream. We study the Eurozone stock markets with the highest capitalizations, seven domestic stock market

indexes: the BEL20 Index (Belgium), the OMX Helsinki Index (Finland), the CAC40 Index (France), the Performance DAX30 Index (Germany), the Milan MIB30 Index (Italy), the AEX Index (The Netherlands), and the IBEX35 Index (Spain); and one aggregate stock market index, the DJEurostoxx50 Index (Eurozone). We provide descriptive statistics to better understand the financial environment in which take place the ECB monetary policy. In Table 5, we present the performance data from 1999 to 2008. Each year, on average, performance ranges from -4.64% for Italy and 4.58% for Finland, to 0.64% for France and 1.13% for Germany. From Datastream, we also extract the sectorial DJEurostoxx index prices. 3.2.2 Event Study Methodology We calculate the abnormal returns using from the event study methodology introduced by Fama et al. (1969). Abnormal returns can be estimated with three different models: the constant mean returns model, the market model, or the adjusted return risk market. The measure of abnormal returns is robust to the choice of model (Brown and Warner, 1985). Because of our focus on index returns, we select the mean constant returns model to estimate the abnormal component of returns of stock market index i at date t: (1) with (2) where is the abnormal return of the stock market index i at day t, reveals the

observed return of the stock market index i at day t, and

indicates the average of returns

of index i over the estimation period. To avoid contamination of the estimation period, we use an estimation period that spans 400 days to 20 days before the announcement date4. We calculate the cross-sectional average abnormal return:

Our results are robust to the length of the estimation period.

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(3)

Table 5 : Performance of the Eurozone Stock Markets

This table presents the annual percentage returns of the Eurozone stock markets between January 1, 1999, and December 31, 2008. The average return over the 1999-2008 period is calculated from the geometrical average. The domestic and aggregate Eurozone stock markets are the BEL20 Index (Belgium), the DJEurostoxx50 Index (Eurozone), the OMX Helsinki Index (Finland), the CAC40 Index (France), the Performance DAX30 Index (Germany), the Milan MIB30 Index (Italy), the AEX Index (The Netherlands), and the IBEX35 Index (Spain).

where n indicates the number of announcements in our sample. Then, we calculate the cumulative abnormal returns by summing the average abnormal returns over the three trading days surrounding the announcement dates [-1 day; +1 day]: (4) This window of three trading days controls for possible news leaks, allows investors time to gather additional information, and avoids overlapping events. To test for statistical significance, we control for event-induced variance (Boehmer et al., 1991). 3.2.3 Classification of Business Conditions Following McQueen and Roley (1993), we use the seasonally adjusted monthly industrial production index of each country to define their business conditions. First, we estimate a trend in the log of industrial production on a constant and a time trend from January 1, 1999, to December 31, 2008. Second, we add and subtract a constant from the trend, creating upper and lower bounds. We choose the constant for each index such that the log

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of industrial production is greater than upper bound, denoted as\high" business activity, 25% of the time. The log of industrial production is less than the lower bound, indicating \low" economic activity, about 25% of the time as well. \Medium" economic activity is represented by the remaining observations between the bounds.

4 Results
We develop the results following the three hypotheses previously mentioned. 4.1 Stock Market Reaction to Unexpected ECB Monetary Policy Table 6 presents the correlation coeffcients between the returns of the aggregate and domestic Eurozone stock markets, the ECB MRO, and the European short interest rates. Not surprisingly, we observe that the aggregate and domestic Eurozone stock market returns are significatively and strongly correlated. The Eurozone returns index is highly correlated with the German and French stock markets returns in particular. Moreover, the European short interest rates and the ECB MRO are significantly and strongly correlated. Finally, we observe a significant negative correlation between the ECB MRO and the domestic Eurozone stock markets returns.

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Table 6 : Correlation Matrix

This table presents the correlation coefficients of the returns of the BEL20 Index (Belgium), the DJEurostoxx50 Index (Eurozone), the OMX Helsinki Index (Finland), the CAC40 Index (France), the Performance DAX30 Index (Germany), the Milan MIB30 Index (Italy), the AEX Index (The Netherlands), and the IBEX35 Index (Spain), as well as the ECB main refinancing operations rates (MRO) and Euribor 3 months. (***),(**), and (*) indicate the significant results at the 1%, 5% and 10% levels, respectively.

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In Table 7, we present the cumulative abnormal returns according to the sign and the degree of the unexpected change in the ECB MRO. We expected a negative relationship between abnormal returns and the sign / degree of the change in the ECB MRO, but our results do not indicate any evidence of an inverse relationship between the abnormal returns and unexpected ECB monetary policy decisions. Thus, we reject hypothesis 1. One day before the announcement date, we observe negative abnormal returns for Finland from a decrease and positive abnormal returns for Belgium for the status quo. One day after the announcement date, we observe negative returns for the German, Italian, and Spanish stock market indexes from an unexpected decrease in the change in the ECB MRO. Moreover, except for France, we do not nd significant cumulative abnormal returns over the event period (-1 day, +1 day). We observe abnormal returns for the Eurozone stock market indexes (with the exceptions of Belgium and Finland) at the announcement date, which mainly occur in response to the status quo and drive wealth destruction for shareholders unless the status quo stands. At the announcement date, we also discover that we have an unexpected increase in ECB monetary policy that are positive abnormal returns. These results suggest that the incorporation of the ECB monetary policy announcement is quick. They also are consistent with research into the speed of convergence toward efficiency around macroeconomic news (Pearce and Roley, 1983; Ederington and Lee, 1995). Accordingly, we focus hereafter on the announcement day for our analyses.

4.2 Stock Market Reaction to Unexpected ECB Monetary Policy According to Business Conditions

From Figure 1, we observe that the moving correlation between the Euribor and the DJEurostoxx50 index is not stationary over time. Over the study period, we observe three cycles with positive moving correlations (from January 2000 to May 2001; from August 2001 to December 2003; and from September 2005 to March 2008). The rest of the analysis period corresponds to negative correlations. Therefore, the decisions of the ECB do not always have pro-cyclical effects on the Eurozone stock market. We split our analysis according to three business conditions defined by McQueen and Roley (1993): low, medium, and high.

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Table 7 : Abnormal Returns for the Eurozone Stock Markets

This table presents the cumulative abnormal returns for the BEL20 Index (Belgium), the DJEurostoxx50 Index (Eurozone), the OMX Helsinki Index (Finland), the CAC40 Index (France), the Performance DAX30 Index (Germany), the Milan MIB30 Index (Italy), the AEX Index (The Netherlands), and the IBEX35 Index (Spain). The abnormal returns are estimated from the constant mean returns model. Event 0 corresponds to the announcement date. Statistical significance is based on Boehmer et al. (1991) and is denoted (***),(**), and (*) for 1%, 5%, and 10% respectively.

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Figure 1 : Moving Correlation Between DJEurostoxx50 and Euribor

Correlation using a 360 days Rolling Window

In Table 8, we present the abnormal returns at the announcement date according to business conditions. We observe different stock market reactions according these economic states. Moreover, our results suggest that the stock market reacts more when the unexpected change in the ECB MRO is downward. We find positive abnormal returns to unexpected decreases in the ECB MRO for four domestic Eurozone stock markets in good economic conditions. For example, in the German stock market, shareholders gained 1.82%. An unexpected decrease in the ECB MRO thus corresponds to a good news for investors when the economy is strong. A strong market's perception of the unexpected decrease in the ECB MRO in good times is similar to that a median of economy. We find significant abnormal returns of 2.35% for the aggregate Spanish stock market. Thus, we valid hypothesis 2.a. However, in contrast with the results for strong and median business conditions, we observe large negative abnormal returns to unexpected decrease in the ECB MRO during bad times, confirming hypothesis 2.b. This finding suggests that investors overreact to an unexpected decrease in bad times, especially if the ECB decreases the MRO. For example, we observe negative abnormal returns of 5.84% for the French stock market index.

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Table 8 : Abnormal Returns of Main Euro Stock Markets According Economic States at the Announcement Date
This table presents the cumulative abnormal returns for the BEL20 Index (Belgium), the DJEurostoxx50 Index (Eurozone), the OMX Helsinki Index (Finland), the CAC40 Index (France), the Performance DAX30 Index (Germany), the Milan MIB30 Index (Italy), the AEX Index (The Netherlands), and the IBEX35 Index (Spain) according to varying business conditions. The abnormal returns are estimated from the constant mean returns model. The economic states as in McQueen and Roley (1993). Statistical significance is based on Boehmer et al. (1991) and is denoted (***),(**), and (*) for 1%, 5%, and 10% respectively.

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Table 9 : Abnormal Returns for the Sectoral Eurozone Stock Indexes at the Announcement Date
This table presents the cumulative abnormal returns for the noncyclical, cyclical, growth, and financial stock groups. The denition of the panels comes from a cluster analysis of Stoxx supersectors. The abnormal returns are estimated from the constant mean returns model. Statistical significance is based on Boehmer et al. (1991) and is denoted (***),(**), and (*) for 1%, 5%, and 10% respectively.

4.3 Stock Market Reaction to Unexpected ECB Monetary Policy According to Industry We finally turn to the question of which sectors are particularly affected by ECB monetary policy. Based on the industry classification benchmark (ICB) published by Stoxx Ltd., we carry out our event study among the European supersectors stock indices. ICB defined 10 industries divided in 19 supersectors. To make this classification more adequate to our methodology, we identify these supersectors in four panels. Unfortunately, because of a lack of data, the real estate supersector has to be removed of our sample. In Table 9 Panel A, we aggregate the following supersectors: Oil & Gas, Chemicals, Basic Resources, Food &

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Beverage, Health Care, and Utilities. These supersectors, over the period of analysis, appears less sensitive than the others to the business condition. That why we define this panel \non cyclical". In contrary, Table 9 Panel B is called \cyclical" and it composed by Construction and Materials, Personal & House Goods, Industrial Goods & Services, Retail, and Travel & Leisure. Supersectors indexes aggregate in Table 9 Panel C, such as Media, Technology, and Telecommunications, are indexes that their performance over the period are fare better than the other indexes. We entitle this panel \growth". We also aggregate the financial indexes in Table 9 Panel D. The effect of monetary policy on stock market returns should differ across supersectors for several reasons such as the interest-sensitivity of the demand, the exchange rate sensitivity for tradable goods industries and o course the financial structure of the firms in a supersector. Table 9 reports the results of our event study on these four panels. First, we find important differences among the panels. We thus find evidence on hypothesis 3. Second, Panel C reacts as expected. An unexpected decrease of the MRO rate leads to a rise of the abnormal returns and vice versa. However, few significant results are concentrated at the status quo event. Third, concerning Panel A, B, and D, the results indicate that in most of supersectors indexes, financial investors react badly when occurs a statu quo. Moreover, we observe positive abnormal returns at the unexpected ECB MRO increase announcements.

5 Conclusion
In this paper, we analyze the Eurozone stock markets' reactions to unexpected ECB monetary announcements. We construct an index including the ECB's decisions unexpected by the ECB watchers. Unexpected announcements correspond to an event, and from these events we carry out an event study in order to assess the abnormal returns of the Eurozone stock markets. Our methodology leads us to several results. First, we observe that the ECB's monetary policy decisions are often predictable. The ECB's communication policy seems to be a success. Second, we find unexpected changes in ECB monetary policy which affect both aggregate and domestic Eurozone stock markets, mainly on the announcement date. Our results suggest that Eurozone stock markets do not react at ECB surprises over the threeday announcement period. Thus, the incorporation of changes in the ECB's MRO into Eurozone stock prices is quick. Third, we nd no evidence of an inverse relationship

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between the abnormal returns of Eurozone stock indexes and MRO around an unexpected ECB monetary policy announcement. Fourth, we distinguish the stock market reaction according to business conditions and industries. We observe that the impact of a surprise monetary policy is negative in a bad business conditions and positive in a good times. Fifth, the unanticipated changes in the ECB MRO rates announcements have abnormal effects only for some sectorial stock indexes. The monetary policy implications of our results are the following. Even if monetary policy makers would like to impact Eurozone stock markets, they only could do it during good conditions. However, there is always a lot of uncertainty to determine these periods. Prudential rules are more likely to have an impact on asset prices. An interesting topic for further research would be to expand our announcements sample to other information released by the ECB, such as the ECB's monthly press conferences. Another one would be to determine the informational content into stock prices of monetary policy news, especially compare with the other economic news.

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