ECB and FOMC Announcement Effects : A Volatility Model Approach of the Spillovers on the Swedish Stock Market

Background: The European Central Bank (ECB) and the Federal Open Market Committee (FOMC) play central roles in the global economic environment, with their target rate decisions and forward guidance significantly influencing financial markets worldwide. While Sweden maintains close economic ties with the Eurozone, the global financial dominance of the U.S. suggests that both the ECB and FOMC announcements may exert substantial spillover effects on Swedish equities. Previous research highlights heterogenous international market responses to such announcements, yet in a Swedish context the research is limited, particularly in terms of market volatility. The study addresses this empirical gap and enhances the understanding of international monetary policy transmissions. Purpose: The purpose of this study is to examine and compare the timing and magnitude of foreign interest rate announcement spillover effects by the ECB and the FOMC on the Swedish stock market. Specifically, the study aims to analyze how scheduled announcements and potential market surprises influence returns and volatility across the broader market and key sectors. Methodology: This study applies an EGARCH model to examine the impact of scheduled and unexpected ECB and FOMC interest rate announcements on daily Swedish stock and sector index returns and volatility from 2010-2025. The surprises of interest rate decisions are modeled using data from the futures market. Conclusion: While both ECB and FOMC influence the Swedish equity market, the results suggests that the FOMC announcements exerts a stronger and more consistent impact, particularly in terms of volatility in the post-announcement window. ECB announcements generally show weaker and more inconsistent effects, with some sector specific responses in the pre-announcement window. However, unexpected target rate decisions from both institutions have more pronounced effects, underscoring the role of surprises in market reactions and on investor sentiment. The U.S. policy decisions tend to dominate volatility responses, whereas ECB decisions tend to exert more significant return responses, highlighting the signaling power of both institutions. Furthermore, the findings indicate asymmetric dynamics in the timing and direction of market responses between the two institutions. These results have important implications for investors, policymakers, and researchers, emphasizing the need to account for global monetary policy dynamics when evaluating domestic market reactions.