What’s at stake: The event study approach – a methodology in finance and economics used to detect the presence of event-induced returns within a period – has become ubiquitous in recent debates about the impact of unconventional monetary operations. But its identifying assumptions are generally not very well understood. In this review, we explain the different steps followed by researchers to perform event-study analyzes; we point out some of their pitfalls, based on recent discussions following the latest Jackson Hole meeting; and we illustrate its growing popularity in a variety of fields. The econometric skeleton of an event study The underlying idea of an event study is to use the high frequency trading values of financial securities to assess the… Read more
Bruegel blog
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Blogs review: The Events Study methodology
8th October 2012
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The bond market consequences of Mr Draghi
14th September 2012
In the last two months, several events have had an impact on the sovereign bond market: the 29 June Euro Summit, Mario Draghi’s 26 July speech at the Global Investment Conference in London, and the European Central Bank Governing Council Decisions of 2 August and 6 September. Sovereign bond yields have come down significantly recently and Figure 1 shows that this has been particularly the case after these events. There has also been some reversal of the positive effects, as we have pointed out previously. The ECB interventions had an effect on the long term yields and also on the shape of the yield curves. Figure 2 plots the Italian and Spanish yield curves the day after (T+1) the above-mentioned… Read more
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Chart of the week: EU Cohesion Policy and the role of national governments
30th August 2012
The official mission of EU Cohesion Policy is to reduce “disparities between the levels of development of the various regions and the backwardness of the least favoured regions”. We run standard convergence analysis and find that this rather broad policy objective is only half-met. Countries and regions in Europe have been converging over the last decade but the dispersion in regional GDP per capita in each country is instead on the rise (Chart 1a). However, if we look at regional disposable income (after benefits and taxes) we do not find the same divergence pattern. This would suggest that governments, which are responsible for determining benefits and taxes, are able to successfully redistribute across regions. Even more interestingly, we do not… Read more
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Are all euro summits the same? Market perceptions before and after
11th July 2012
Commentators have frequently argued that all Euro Summits exhibit a similar pattern with significant euphoria after the summit in the financial markets that then soon abates when markets wake up to the actual difficulties of implementing decisions[1]. In this contribution, we study the pattern in government bond yields in the five days before and after euro area summits for Italy, Spain, Germany, France and the EFSF. We normalize the 10 year yield to 1 at t=date of the Summit and plot the yields before and after. We select five Euro Summits’ Dates of significant importance, namely the 7th of May 2010, 21st of July 2011, 26th of October 2011, 2nd of March 2011, 29th of June 2012[2]. A number of… Read more
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Chart of the week: the silent run
24th May 2012
Yesterday’s informal dinner of the European Council discussed the growth agenda and the prospect for Eurobonds. But it also, for the first time, erred the idea of a supranational deposit guarantee scheme. This is something we had been advocating for a very long time but has taken a whole new sense of urgency with the acceleration of deposit attrition in a number of countries. The monthly data suggest nonetheless that “runs” on banks are still very localized and that they are largely concentrated in Greece and Ireland. However, the debate over a deposit guarantee (whose shape and form is still unclear) could be immensely helpful in reducing the risks of deposits flight in other fragile banking systems (Spain, Cyprus…). More… Read more
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Chart of the week: banking and sovereign risk: is it banks’ holding of government debt or banks’ location?
29th March 2012
Since the start of the European sovereign debt crisis, the interdependence between banks and sovereign risk has been emphasised. This week's chart shows the positive correlation between sovereign and bank credit default swaps (CDS) for a number of euro-area countries during 2011. Read more
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LTRO, interbank stress and banks’ stock prices: a conundrum?
28th March 2012
Stress in the interbank market increased steeply after July 2011. The figure below shows the pattern of the Euribor-Eonia Swap spread, an indicator of the interbank market stress, from 2007 up to now. A first peak was recorded at the end of September 2011 and then the stress peaked in December 2011. Since the end of December, the spread receded considerably and this can be linked to the long-term refinancing operations (LTRO) of the ECB which has provided abundant liquidity to banks to ensure their financing. Read more