Quantitative Easing and Equity Prices: Evidence from the ETF Program of the Bank of Japan

Andrea Barbon and Virginia Gianinazzi
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Andrea Barbon: Università della Svizzera italiana (USI), Lugano; Swiss Finance Institute, Students
Virginia Gianinazzi: Università della Svizzera italiana (USI), Lugano; Swiss Finance Institute

No 19-55, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Since the introduction of its Quantitative and Qualitative Easing program in 2013, the Bank of Japan has been increasing its holdings of Japanese equity through large scale purchases of index-linked ETFs with the intention of lowering assets' risk premia. We exploit the cross-sectional heterogeneity of the shock to supply induced by the policy to identify a positive, sizeable and persistent impact on stock prices consistent with a portfolio balance channel. The evidence suggests that demand curves for stocks are downward sloping in the long-run. We estimate an increase of 22 basis points in aggregate market valuation per trillion Yen invested into the program, corresponding to a price elasticity of 1. We show that the purchases of ETFs tracking the price-weighted Nikkei 225 index generate significant pricing distortions relative to a value-weighted benchmark. Finally, we provide a rigorous framework to discuss the consequences of a potential exit strategy from QE.

Keywords: ETFs; quantitative easing; portfolio balance channel; unconventional monetary policy; Bank of Japan (search for similar items in EconPapers)
JEL-codes: B26 E52 E58 (search for similar items in EconPapers)
Pages: 68 pages
Date: 2019-04
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (31)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1955

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