The effect of European Central Bank’s longer term refinancing operations on eurozone bank stock performance

Abstract

As a response to the financial crisis, to support the funding conditions for banks and to keep the contagion in the euro zone financial markets contained, the European Central Bank introduced an additional non-standard longer term refinancing operation, LTRO. The agreed package of measures included two LTROs with a maturity of three years and the option of early repayment.

The purpose of the thesis is to examine what kind of an effect the European Central Bank’s three-year loan operations had on the performance of bank stocks on the Euro STOXX TM-index and also using the Euro STOXX TMI data, to determine the effects of the loan operation, in terms of bank stock abnormal (excess) returns and investor reactions.

Event study methodology is used to determine the abnormal performance for bank stocks and to analyze the results. The study is divided into four event windows, each representing a certain time period; the announcement, issuance 1, issuance 2 and the event period.

The results show only a slight reaction to the LTRO in terms of abnormal returns. The effect of the first issuance is positive and the effect of the second issuance is negative. The effect of the announcement seems to be slightly negative, whereas the cumulative abnormal return at the end of the event period is positive. The results of the study do not induce a statistically significant market reaction in stock returns in the short-term or the long-term.