Marginal impact of US and European monetary policies (2010-2019) on banks compared to insurance companies : CDS analysis and Event Study using ARMA model

Abstract

The purpose of this thesis is to compare the banking industry with the insurance industry in terms of financial impact due to US and European monetary policy from 2010 to 2019. In total, we have listed 35 different monetary policy events for the FED and then for the ECB. We have also selected two sub-indices of the STOXX 600 index for Europe, and 21 Standard & Poor’s stock sub-indices for the US, since S&P’s indices divide their stock index according to their market capitalization and their type of services. That possibility to segment US data allowed us to analyse the impact in a deeper way. We computed two-day abnormal returns following each event date by forecasting the expected value of the indices through an ARMA model. Regarding the US, our results suggest that banks there reacted more positively to announcements of new programs and their extensions and were less reactive to less tangible events. The insurance industry has been more impacted by the significant post-crisis policy regarding the federal funding rate and by the event concerning raising the FFR for the first time since the crisis period. Responses to statements about strategy and Policy Normalization Principles have been more important to US insurance companies’ indices since their abnormal returns are more important and more statistically significant. About Europe, the banks’ stock market has been more positively affected by the launch of SMP, ABSPP and the news regarding the conclusion of global APP while the insurance industry further reacted to CBPP2, the announcement of OMT, and the launches of the CBPP3 and PSPP. Due to the lack of any events specifically about key interest rates changes, we could not make any clear conclusions about the differences in sensitivity between the two industries. Finally, banks are more concerned and affected by LTRO and TLTRO announcements. A second part of the thesis consisted of observing the variations in the credit default swap spread of a small sample of banks and insurance companies, quoted with a mid-price of five-year maturity senior unsecured debt, shortly around selected events related to quantitative easing. In order to compare both industries using CDS as a risk indicator, we applied Welch’s t-test which determines if the difference between the two samples is statistically different and we also calculated the cumulative average of CDS spread variation. Our results suggest that variations of US insurance companies are more consequent for the events where the difference between both industries is statistically significant. In Europe, the cumulative average of variations of CDS spreads for both industries always move in the same direction, but banks’ risk of default is further reduced when the spreads are decreasing and are less affected when the spreads go up.