Scarcity and Spotlight Effects on Liquidity and Yield: Quantitative Easing in Japan

Loriana Pelizzon (), Marti G. Subrahmanyam, Reiko Tobe and Jun Uno
Additional contact information
Marti G. Subrahmanyam: Leonard N. Stern School of Business, New York University (msubrahm@stern.nyu.edu)
Reiko Tobe: Waseda University (r.tobe@aoni.waseda.jp)
Jun Uno: Waseda University (juno@waseda.jp)

No 18-E-14, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: We investigate the determinants of the term structures of market liquidity and bond yield in the case of the Quantitative Easing ( QE) programs implemented by the Bank of Japan (BoJ). We distinguish between two opposing effects of QE on the liquidity of Japanese Government Bonds, the "scarcity effect," which is gradually manifested as a negative impact on liquidity, due to the shrinkage in the available supply of bonds; and the "spotlight effect," which induces an immediate improvement in liquidity, reflecting BOJ's massive demand. Between 2011 and 2016, we find that government bonds show an improvement in liquidity through the spotlight effect, but also experience a deterioration in liquidity through the scarcity effect. As for the yield, both the spotlight and scarcity effects work in the same direction (i.e., they raise bond prices) against theoretical expectation. Illiquidity caused by scarcity amplifies the yield decline rather than adding to the illiquidity premium.

Keywords: Sovereign Bonds; Quantitative Easing; Market Liquidity; Scarcity; Spotlight (search for similar items in EconPapers)
JEL-codes: C54 E43 E52 E58 G12 G14 (search for similar items in EconPapers)
Date: 2018-09
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
https://www.imes.boj.or.jp/research/papers/english/18-E-14.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ime:imedps:18-e-14

Access Statistics for this paper

More papers in IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan Contact information at EDIRC.
Bibliographic data for series maintained by Kinken ().