The effects of Bundesbank discount and Lombard rate changes on German bank stocks

We investigate whether Bundesbank interest rate changes convey information to investors about future financial market and economic conditions, especially as they affect banking and bank equities. We find that increases in Bundesbank discount and Lombard rates are associated with negative abnormal returns on German equities and negative market adjusted abnormal returns on bank stocks. Decreases in official rates are associated with positive market wide returns and positive market adjusted abnormal returns on bank stocks. We conclude that Bundesbank discount and Lombard interest rate changes are systemic events which lead investors to revalue the expected cash flows and/or required rates of return on both bank and non-bank German equities.