Quantitative Easing and Equity Prices: Evidence from the ETF Program of the Bank of Japan

Swiss Finance Institute Research Paper No. 19-55

Forthcoming in The Review of Asset Pricing Studies

68 Pages Posted: 2 Mar 2017 Last revised: 23 Oct 2019

See all articles by Andrea Barbon

Andrea Barbon

University of St. Gallen

Virginia Gianinazzi

Università della Svizzera italiana (USI), Lugano; Swiss Finance Institute

Date Written: April 30, 2019

Abstract

Since the introduction of its Quantitative and Qualitative Easing program in 2013, the Bank of Japan has been increasing its holdings of Japanese equity through large scale purchases of index-linked ETFs with the intention of lowering assets' risk premia. We exploit the cross-sectional heterogeneity of the shock to supply induced by the policy to identify a positive, sizeable and persistent impact on stock prices consistent with a portfolio balance channel. The evidence suggests that demand curves for stocks are downward sloping in the long-run. We estimate an increase of 22 basis points in aggregate market valuation per trillion Yen invested into the program, corresponding to a price elasticity of 1. We show that the purchases of ETFs tracking the price-weighted Nikkei 225 index generate significant pricing distortions relative to a value-weighted benchmark. Finally, we provide a rigorous framework to discuss the consequences of a potential exit strategy from QE.

Keywords: ETFs, quantitative easing, portfolio balance channel, unconventional monetary policy, Bank of Japan

JEL Classification: E52, E58, B26

Suggested Citation

Barbon, Andrea and Gianinazzi, Virginia, Quantitative Easing and Equity Prices: Evidence from the ETF Program of the Bank of Japan (April 30, 2019). Swiss Finance Institute Research Paper No. 19-55, Forthcoming in The Review of Asset Pricing Studies, Available at SSRN: https://ssrn.com/abstract=2925198 or http://dx.doi.org/10.2139/ssrn.2925198

Andrea Barbon (Contact Author)

University of St. Gallen ( email )

Bodanstrasse 8
SIAW-HSG
St.Gallen, 9000
Switzerland

HOME PAGE: http://www.abarbon.com

Virginia Gianinazzi

Università della Svizzera italiana (USI), Lugano ( email )

Via G. Buffi 13
Lugano, 6904
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
472
Abstract Views
2,555
rank
72,020
PlumX Metrics