Global financial crisis, liquidity pressure in stock markets and efficiency of central bank interventions

Mohamed El Hedi Arouri (1, 2) , Fredj Jawadi (1, 2) , Duc Khuong Nguyen (3)

1 EconomiX - EconomiX
2 LEO - Laboratoire d'économie d'Orleans [2008-2011]
3 CERAG - Centre d'études et de recherches appliquées à la gestion

In this article, we investigate the hypothesis of efficiency of central bank intervention policies within the current global financial crisis. We firstly discuss the major existing interventions of central banks around the world to improve liquidity, restore investor confidence and avoid a global credit crunch. We then evaluate the short-term efficiency of these policies in the context of the UK, the US and the French financial markets using different modelling techniques. On the one hand, the impulse response functions in a Structural Vector Autoregressive (SVAR) model are used to apprehend stock market reactions to central bank policies. On the other hand, since these reactions are likely to be of an asymmetric and nonlinear nature, a two-regime Smooth Transition Regression-Generalized Autoregressive Conditional Heteroscedasticity (STR-GARCH) model is estimated to explore the complexity and nonlinear responses of stock markets to exogenous shifts in monetary policy shocks. As expected, our findings show strong repercussions from interest rate changes on stock markets, indicating that investors keep a close eye on central bank intervention policies to make their trading decisions. The stock markets lead monetary markets, however, when central banks are slow to adjust their benchmark interest rates

Domaines: Finance [q-fin.GN]

Mohamed El Hedi Arouri, Fredj Jawadi, Duc Khuong Nguyen. Global financial crisis, liquidity pressure in stock markets and efficiency of central bank interventions. 2010. ⟨hal-00507821⟩