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

Author

Listed:
  • Loriana Pelizzon

    (SAFE Goethe University Frankfurt and Ca'Foscari University of Venice (pelizzon@safe.uni-frankfurt.de))

  • 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))

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.

Suggested Citation

  • Loriana Pelizzon & Marti G. Subrahmanyam & Reiko Tobe & Jun Uno, 2018. "Scarcity and Spotlight Effects on Liquidity and Yield: Quantitative Easing in Japan," IMES Discussion Paper Series 18-E-14, Institute for Monetary and Economic Studies, Bank of Japan.
    • Handle: RePEc:ime:imedps:18-e-14
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    References listed on IDEAS

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    Cited by:

    1. Hattori, Takahiro, 2021. "Noise as a liquidity measure: Evidence from the JGB market," Pacific-Basin Finance Journal, Elsevier, vol. 67(C).
    2. Blix Grimaldi, Marianna & Crosta, Alberto & Zhang, Dong, 2021. "The Liquidity of the Government Bond Market – What Impact Does Quantitative Easing Have? Evidence from Sweden," Working Paper Series 402, Sveriges Riksbank (Central Bank of Sweden).
    3. Tobe, Reiko & Uno, Jun, 2024. "Central bank asset purchases and lending: Impact on search frictions," Journal of Financial Intermediation, Elsevier, vol. 58(C).
    4. Boneva, Lena & Islami, Mevlud & Schlepper, Kathi, 2024. "Liquidity in the German corporate bond market: Has the CSPP made a difference?," Journal of International Money and Finance, Elsevier, vol. 147(C).
    5. Lena Boneva & David Elliott & Iryna Kaminska & Oliver Linton & Nick McLaren & Ben Morley, 2022. "The Impact of Corporate QE on Liquidity: Evidence from the UK," The Economic Journal, Royal Economic Society, vol. 132(648), pages 2615-2643.
    6. Christensen, Jens H.E. & Gillan, James M., 2022. "Does quantitative easing affect market liquidity?," Journal of Banking & Finance, Elsevier, vol. 134(C).
    7. Hattori, Takahiro, 2019. "Do liquidity enhancement auctions improve the market liquidity in the JGB market?," Economics Letters, Elsevier, vol. 183(C), pages 1-1.
    8. Nao Sudo & Masaki Tanaka, 2018. "Do Market Segmentation and Preferred Habitat Theories Hold in Japan? : Quantifying Stock and Flow Effects of Bond Purchases," Bank of Japan Working Paper Series 18-E-16, Bank of Japan.

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    More about this item

    Keywords

    Sovereign Bonds; Quantitative Easing; Market Liquidity; Scarcity; Spotlight;
    All these keywords.

    JEL classification:

    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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