IDEAS home Printed from https://ideas.repec.org/a/gam/jijfss/v10y2022i4p114-d1000083.html
   My bibliography  Save this article

A Structural Time Series Analysis of the Effect of Quantitative Easing on Stock Prices

Author

Listed:
  • George B. Tawadros

    (Department of Economics, College of Business, Winona State University, Winona, MN 55987, USA)

  • Imad A. Moosa

    (Department of Economics, Kuwait University, Shaddadiya 46410, Kuwait)

Abstract

In this paper, a structural time series model is estimated to analyse the effect of quantitative easing (QE) on stock prices for the US, UK and Japan. The model is estimated by maximum likelihood in a time-varying parametric framework, using the DJIA, S&P500, NASDAQ, FTSE100 and the NIKKEI225 as the dependent variable and the balance sheet of the respective Central Bank as an explanatory variable, along with the unobserved components that account for the behaviour of other explanatory variables that are not explicitly specified in the model. The results show that QE had a significant but not exclusive effect on the DJIA, S&P500 and the NASDAQ, suggesting that these stock prices are also affected by other missing variables and cyclical movements. However, for the UK and Japan, no effect of QE on the FTSE100 and the NIKKEI225 is found, suggesting that variables other than QE are important for the rise in these stock prices. One plausible explanation for this result is that perhaps QE becomes effective only after a certain threshold level is met.

Suggested Citation

  • George B. Tawadros & Imad A. Moosa, 2022. "A Structural Time Series Analysis of the Effect of Quantitative Easing on Stock Prices," IJFS, MDPI, vol. 10(4), pages 1-17, December.
    • Handle: RePEc:gam:jijfss:v:10:y:2022:i:4:p:114-:d:1000083
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2227-7072/10/4/114/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2227-7072/10/4/114/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Barry Bosworth, 1975. "The Stock Market and the Economy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(2), pages 257-300.
    2. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2011. "The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(2 (Fall)), pages 215-287.
    3. Hamburger, Michael J & Kochin, Levis A, 1972. "Money and Stock Prices: The Channels of Influence," Journal of Finance, American Finance Association, vol. 27(2), pages 231-249, May.
    4. Michael A.S. Joyce & Matthew Tong, 2012. "QE and the Gilt Market: a Disaggregated Analysis," Economic Journal, Royal Economic Society, vol. 122(564), pages 348-384, November.
    5. Fama, Eugene F, 1981. "Stock Returns, Real Activity, Inflation, and Money," American Economic Review, American Economic Association, vol. 71(4), pages 545-565, September.
    6. Cúrdia, Vasco & Woodford, Michael, 2011. "The central-bank balance sheet as an instrument of monetarypolicy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 54-79, January.
    7. Jonathan H. Wright, 2012. "What does Monetary Policy do to Long‐term Interest Rates at the Zero Lower Bound?," Economic Journal, Royal Economic Society, vol. 122(564), pages 447-466, November.
    8. Urszula Szczerbowicz, 2015. "The ECB Unconventional Monetary Policies: Have They Lowered Market Borrowing Costs for Banks and Governments?," International Journal of Central Banking, International Journal of Central Banking, vol. 11(4), pages 91-127, December.
    9. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
    10. Joseph Gagnon & Matthew Raskin & Julie Remache & Brian Sack, 2011. "The Financial Market Effects of the Federal Reserve's Large-Scale Asset Purchases," International Journal of Central Banking, International Journal of Central Banking, vol. 7(1), pages 3-43, March.
    11. Sulaiman A. Al-Jassar & Imad A. Moosa, 2019. "The effect of quantitative easing on stock prices: a structural time series approach," Applied Economics, Taylor & Francis Journals, vol. 51(17), pages 1817-1827, April.
    12. Homa, Kenneth E & Jaffee, Dwight M, 1971. "The Supply of Money and Common Stock Prices," Journal of Finance, American Finance Association, vol. 26(5), pages 1045-1066, December.
    13. Ben S. Bernanke & Vincent R. Reinhart, 2004. "Conducting Monetary Policy at Very Low Short-Term Interest Rates," American Economic Review, American Economic Association, vol. 94(2), pages 85-90, May.
    14. Firth, Michael, 1979. "The Relationship between Stock Market Returns and Rates of Inflation," Journal of Finance, American Finance Association, vol. 34(3), pages 743-749, June.
    15. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
    16. Fama, Eugene F. & Schwert, G. William, 1977. "Asset returns and inflation," Journal of Financial Economics, Elsevier, vol. 5(2), pages 115-146, November.
    17. Joyce, Michael & Tong, Matthew & Woods, Robert, 2011. "The United Kingdom’s quantitative easing policy: design, operation and impact," Bank of England Quarterly Bulletin, Bank of England, vol. 51(3), pages 200-212.
    18. Thomas I. Palley, 2011. "Quantitative Easing: A Keynesian Critique," Working Papers wp252, Political Economy Research Institute, University of Massachusetts at Amherst.
    19. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2011. "The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 43(2 (Fall)), pages 215-287.
    20. Lintner, John, 1975. "Inflation and Security Returns," Journal of Finance, American Finance Association, vol. 30(2), pages 259-280, May.
    21. Fischbacher, Urs & Hens, Thorsten & Zeisberger, Stefan, 2013. "The impact of monetary policy on stock market bubbles and trading behavior: Evidence from the lab," Journal of Economic Dynamics and Control, Elsevier, vol. 37(10), pages 2104-2122.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Michael A. S. Joyce & Nick McLaren & Chris Young, 2012. "Quantitative easing in the United Kingdom: evidence from financial markets on QE1 and QE2," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 28(4), pages 671-701, WINTER.
    2. Michael Joyce & David Miles & Andrew Scott & Dimitri Vayanos, 2012. "Quantitative Easing and Unconventional Monetary Policy – an Introduction," Economic Journal, Royal Economic Society, vol. 122(564), pages 271-288, November.
    3. Wang, Ling, 2019. "Measuring the effects of unconventional monetary policy on MBS spreads: A comparative study," The North American Journal of Economics and Finance, Elsevier, vol. 49(C), pages 235-251.
    4. Urbschat, Florian & Watzka, Sebastian, 2020. "Quantitative easing in the Euro Area – An event study approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 77(C), pages 14-36.
    5. Cenedese, Gino & Elard, Ilaf, 2021. "Unconventional monetary policy and the portfolio choice of international mutual funds," Journal of International Money and Finance, Elsevier, vol. 115(C).
    6. Matteo Falagiarda, 2014. "Evaluating quantitative easing: a DSGE approach," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 7(4), pages 302-327.
    7. Dimitris Malliaropulos & Petros Migiakis, 2018. "Quantitative easing and sovereign bond yields: a global perspective," Working Papers 253, Bank of Greece.
    8. Falagiarda, Matteo & Reitz, Stefan, 2015. "Announcements of ECB unconventional programs: Implications for the sovereign spreads of stressed euro area countries," Journal of International Money and Finance, Elsevier, vol. 53(C), pages 276-295.
    9. Christophe Blot & Jérôme Creel & Paul Hubert & Fabien Labondance, 2015. "The QE experience: Worth a try?," Post-Print hal-03459951, HAL.
    10. Christophe Blot & Jérôme Creel & Paul Hubert & Fabien Labondance, 2015. "Que peut-on attendre de l’assouplissement quantitatif de la BCE ?," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(2), pages 265-290.
    11. repec:hal:spmain:info:hdl:2441/166ip2fse39118p4oksocrf89u is not listed on IDEAS
    12. Sophocles N. Brissimis & Evangelia A. Georgiou, 2022. "The effects of Federal Reserve's quantitative easing and balance sheet normalization policies on long-term interest rates," Working Papers 299, Bank of Greece.
    13. Jakub Janus, 2016. "The Transmission Mechanism Of Unconventional Monetary Policy," Oeconomia Copernicana, Institute of Economic Research, vol. 7(1), pages 7-21, March.
    14. repec:hal:spmain:info:hdl:2441/4qb2og10r48j2r0b43vmrub4pd is not listed on IDEAS
    15. repec:spo:wpmain:info:hdl:2441/76n8jifalu9pravs72etj3lddb is not listed on IDEAS
    16. Wang, Ling, 2022. "The dynamics of money supply determination under asset purchase programs: A market-based versus a bank-based financial system," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 79(C).
    17. repec:spo:wpmain:info:hdl:2441/166ip2fse39118p4oksocrf89u is not listed on IDEAS
    18. repec:hal:spmain:info:hdl:2441/76n8jifalu9pravs72etj3lddb is not listed on IDEAS
    19. Falagiarda, Matteo & Reitz, Stefan, 2013. "Announcements of ECB unconventional programs: Implications for the sovereign risk of Italy," Kiel Working Papers 1866, Kiel Institute for the World Economy (IfW Kiel).
    20. Bailey, Andrew & Bridges, Jonathan & Harrison, Richard & Jones, Josh & Mankodi, Aakash, 2020. "The central bank balance sheet as a policy tool: past, present and future," Bank of England working papers 899, Bank of England.
    21. Florian Urbschat & Sebastian Watzka, 2017. "Quantitative Easing in the Euro Area - An Event Study Approach," CESifo Working Paper Series 6709, CESifo.
    22. repec:spo:wpmain:info:hdl:2441/4qb2og10r48j2r0b43vmrub4pd is not listed on IDEAS
    23. Abdoulaye Millogo, 2020. "Hysteresis Effects and Macroeconomics Gains from Unconventional Monetary Policies Stabilization," Cahiers de recherche 20-12, Departement d'économique de l'École de gestion à l'Université de Sherbrooke.
    24. Kaoru Hosono & Shogo Isobe, 2014. "The Financial Market Impact of Unconventional Monetary Policies in the U.S., the U.K., the Eurozone, and Japan," Discussion papers ron259, Policy Research Institute, Ministry of Finance Japan.
    25. Guidolin, Massimo & Orlov, Alexei G. & Pedio, Manuela, 2017. "The impact of monetary policy on corporate bonds under regime shifts," Journal of Banking & Finance, Elsevier, vol. 80(C), pages 176-202.
    26. Peter Sellin, 2001. "Monetary Policy and the Stock Market: Theory and Empirical Evidence," Journal of Economic Surveys, Wiley Blackwell, vol. 15(4), pages 491-541, September.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jijfss:v:10:y:2022:i:4:p:114-:d:1000083. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.