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Over the last few years, the European Central Bank (ECB) has adopted unconventional monetary policies. These measures aim to boost economic growth and increase inflation through the bond market. The purpose of this paper is to study the impact of the ECB’s quantitative easing (QE) on the investor’s behavior in the stock market.

First, the authors theoretically identify the transmission channels of the QE shocks to the stock market. Then, the authors empirically assess the financial market’s responses to QE shocks in a data-rich environment using a factor augmented VAR (FAVAR).

The results show that the ECB’s unconventional monetary policy positively affects the stock market. A QE shock leads to an increase in stock prices and a drop in the realized volatility and the implied risk premium. The authors also suggest that the ECB’s QE is transmitted to the stock market through five main channels: the liquidity, the expectation, the portfolio reallocation, the interest rates and the risk premium channels.

The findings help to better understand the behavior of stock market assets in a data-rich economic context and guide investors and policymakers in the presence of unconventional monetary tools. For instance, decision-makers and investors should consider the short-term effect of the QE interventions and the changing behavior of the financial actors over time. In addition, high stock market returns can increase risk appetite. This can lead investors to underestimate the market risk. Decision-makers and market participants should take into consideration the impact of the large injection of money through the QE, which may raise the risk of a speculative bubble in the financial market.

To the best of the authors’ knowledge, this is the first study that incorporates a theoretical and empirical analysis to explore QE transmission to the stock market in the European context. Unlike previous studies, the authors use the shadow rate proposed by Wu and Xia (2017) to quantify the effect of the ECB’s QE in a data-rich environment. The authors also include two key risk indicators – the stock market risk premium and the realized volatility – to capture investors’ behavior in the stock market following QE shocks.

The paper investigates the dynamic relationship between oil prices, the USA dollar exchange rate and the Saudi stock market index.

The authors perform a novel dynamic simulated the autoregressive distributed lag (ARDL) on weekly data from 2010 to 2021.

The authors' work reveals three main results: First, a cointegration relationship exists between oil prices and the Saudi stock market index. Second, the Saudi stock market is strongly affected by fluctuations in oil prices in both the short and long run. Third, the exchange rate of the USA dollar has a slight influence on the movements of the Saudi stock market. The simulations show that the Saudi stock market index has a long-run upward trend after an oil price shock, while the dollar index rises moderately after a similar shock. Moreover, the first months of the COVID-19 pandemic coincided with a significant decline in the Saudi stock market index, particularly the substantial drop in oil prices.

These findings encourage domestic and foreign investors to benefit from an upward trend in oil prices, especially after the opening of the Saudi market to foreign investment. On the other hand, it raises questions about the Saudi economy's dependence on oil as the sole vehicle for output growth. It highlights the urgent need for diversification and productivity growth in the non-oil sector and other renewable natural resources to increase Saudi competitiveness.

The novelty of the research lies in the following. First, the authors apply one of the latest developments in time-series modeling techniques. This dynamic ARDL simulation model provides a worthwhile alternative way to explore dynamic correlations in the short and long run and assess the choc effects. Secondly, the study would enable us to track the impact of the COVID-19 health crisis on the Saudi stock market.