Portfolio Balance Effects and the Federal Reserve's Large-Scale Asset Purchases

Abstract

Whereas much of previous literature focuses upon the impact on yields from the Federal Reserve's large-scale asset purchases (LSAPs), we study the changes to expected returns. Through a simple general equilibrium model, we motivate how LSAPs may impact equilibrium bond and equity expected returns. Our empirical investigation offers support for changes to risk premia coincident with LSAPs. For both equity and bonds, we find evidence for supply/demand LSAPs effects; equity effects consistent with conventual theory whereas bond effects appear to be an anomaly. Such findings represent novel insight for weighing the efficacy and identifying the scope of LSAPs.

Keywords: Quantitative easing, portfolio balance, equity risk premium, bond risk premium

JEL Classification: E43, E52, G11, G12