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Quantitative easing and exuberance in stock markets: Evidence from the euro area

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  • Hudepohl, Tom
  • van Lamoen, Ryan
  • de Vette, Nander

Abstract

In response to a prolonged period of low inflation, the ECB introduced QE in an attempt to steer inflation to its target of below, but close to, 2% in the medium term. This paper examines whether QE contributes to exuberance in euro area stock markets by using recent advances in bubble detection techniques (the GSADF test). We do so by linking price developments in ten euro area stock markets to a series of country specific macro fundamentals and QE. The results indicate that periods of QE coincide with exuberant investor behaviour, even after controlling for improving macro fundamentals.

Suggested Citation

  • Hudepohl, Tom & van Lamoen, Ryan & de Vette, Nander, 2021. "Quantitative easing and exuberance in stock markets: Evidence from the euro area," Journal of International Money and Finance, Elsevier, vol. 118(C).
    • Handle: RePEc:eee:jimfin:v:118:y:2021:i:c:s0261560621001224
    DOI: 10.1016/j.jimonfin.2021.102471
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    5. Rhea Choudhary, 2022. "Analysing the spillover effects of the South African Reserve Banks bond purchase programme," Working Papers 11025, South African Reserve Bank.
    6. Tomás Carrera de Souza & Tom Hudepohl, 2022. "The Eurosystem’s bond market share at an all-time high: what does it mean for repo markets?," Working Papers 745, DNB.
    7. Yang, Hui & Ferrer, Román, 2023. "Explosive behavior in the Chinese stock market: A sectoral analysis," Pacific-Basin Finance Journal, Elsevier, vol. 81(C).
    8. Axelsson, Birger & Song, Han-Suck, 2023. "The effect of quantitative easing and quantitative tightening on U.S. equity REIT returns," Working Paper Series 23/9, Royal Institute of Technology, Department of Real Estate and Construction Management & Banking and Finance, revised 14 Nov 2023.
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    More about this item

    Keywords

    Exuberance; Asset price bubbles; Unconventional monetary policy; Quantitative easing;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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