Portfolio Balance Effects and the Equity Market

32 Pages Posted: 29 Oct 2015

See all articles by Thomas Emmerling

Thomas Emmerling

Zicklin School of Business, Baruch College - The City University of New York

Robert A. Jarrow

Cornell University - Samuel Curtis Johnson Graduate School of Management

Yildiray Yildirim

Zicklin School of Business, Baruch College - The City University of New York

Date Written: October 27, 2015

Abstract

Many monetary studies on the portfolio balance effect omit its impact to equity returns. Motivated through a simple general equilibrium model, we study how changes in the bond supply affect the overall equity market. Our model predicts that exogenous increases (decreases) in the bond supply coincide with a lower (higher) equity price, all else equal. A historical investigation from 1952-2014 discovers asymmetric effects, both leading to higher equity prices. While the portfolio balance channel explains how unexpected downward shifts in the bond supply lead to higher equity prices, empirical evidence suggests unexpected upward shifts coincide with higher inflation.

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

JEL Classification: E43, E52, G11, G12

Suggested Citation

Emmerling, Thomas and Jarrow, Robert A. and Yildirim, Yildiray, Portfolio Balance Effects and the Equity Market (October 27, 2015). Available at SSRN: https://ssrn.com/abstract=2681330 or http://dx.doi.org/10.2139/ssrn.2681330

Thomas Emmerling (Contact Author)

Zicklin School of Business, Baruch College - The City University of New York ( email )

One Bernard Baruch Way
Box C-403
New York, NY 10010
United States

HOME PAGE: http://zicklin.baruch.cuny.edu/faculty/profiles/thomas-j.-emmerling

Robert A. Jarrow

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Department of Finance
Ithaca, NY 14853
United States
607-255-4729 (Phone)
607-254-4590 (Fax)

Yildiray Yildirim

Zicklin School of Business, Baruch College - The City University of New York ( email )

55 Lexington Ave., Box B13-260
New York, NY 10010
United States

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