Pancotto, L., ap Gwilym, O. and Molyneux, P. (2023) Deal! Market reactions to the agreement on the EU Covid-19 recovery fund. Journal of Financial Stability, 67. ISSN 1572-3089
Abstract
In response to the Covid-19 crisis, EU leaders agreed on the creation of a €750bn recovery fund (the Next Generation EU, NGEU). We investigate the short-term impact of this landmark deal on bank stocks, sovereign credit default swaps (CDS) and bank CDS. First, we find that stock market investors firmly welcomed the agreement as we find sizeable positive abnormal returns in bank stocks as a response to the NGEU proposal by the European Commission. Spreads on sovereign and bank CDS significantly declined, with more pronounced movements for heavily indebted countries and those that strongly advocated the creation of the recovery fund and for the banks located in these economies. Second, we show that banks’ sovereign exposures towards other European countries, especially those with weaker financial conditions and limited fiscal capacity, play a key role in driving the strength of the stock market reaction. Overall, financial markets responded positively to the credibility of the NGEU policy as an extraordinary common effort to support the post-Covid-19 recovery and enhance economic growth in the region.
Metadata
Item Type: | Article |
---|---|
Authors/Creators: |
|
Copyright, Publisher and Additional Information: | © 2023 The Author(s). Published by Elsevier B.V. This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/). |
Keywords: | NGEU; Covid-19 crisis; Stock market; CDS market; Event study |
Dates: |
|
Institution: | The University of Leeds |
Academic Units: | The University of Leeds > Faculty of Business (Leeds) > Accounting & Finance Division (LUBS) (Leeds) |
Depositing User: | Symplectic Publications |
Date Deposited: | 30 Aug 2023 12:59 |
Last Modified: | 30 Aug 2023 12:59 |
Status: | Published |
Publisher: | Elsevier |
Identification Number: | 10.1016/j.jfs.2023.101157 |
Open Archives Initiative ID (OAI ID): | oai:eprints.whiterose.ac.uk:202766 |