Quantitative Easing and the U.S. Stock Market: A Decision Tree Analysis

Abstract

The Financial Crisis of 2007-09 caused the U.S. economy to experience a relatively long recession from December 2007 to June 2009. Both the U.S. government and the Federal Reserve undertook expansive fiscal and monetary policies to minimize both the severity and length of the recession. Most notably, the Federal Reserve initiated three rounds of unconventional monetary policies known as Quantitative Easing. These policies were intended to reduce long-term interest rates when the short term federal funds rates had reached the zero lower bound and could not become negative. It was argued that the lowering of longer-term interest rates would help the stock market and thus the wealth of consumers. This paper investigates this hypothesis and concludes that quantitative easing has contributed to the observed increases in the stock market’s significant recovery since its crash due to the financial crisis.

Keywords: Quantitative Easing, Decision Tree, Stock Market, S&P 500 Index, 10 Year Notes

JEL Classification: C10; C45; C58; E52; E58