Monetary Policy Through the Stock Market: Central Bank Purchase of Equity Index ETFs

67 Pages Posted: 2 Oct 2019

See all articles by Zhuo Chen

Zhuo Chen

University of New South Wales (UNSW)

Keiichi Ito

SMBC Nikko Securities

Takeshi Yamada

Australian National University (ANU)

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen

Date Written: September 23, 2019

Abstract

As part of its unconventional monetary policy, since 2010 the Bank of Japan (BOJ) has purchased equity index exchange-traded funds (ETFs). The total purchased amount reached 3% of GDP and the bank has become among the largest shareholders in over 40% of listed companies. Because of the reduction in float shares and the non-informational nature of the BOJ purchases, liquidity and price informativeness of the underlying shares deteriorates, increasing friction in the share market. The number of shareholders, institutional ownership, and analyst coverage all decreased for firms in which the BOJ holds shares. These firms issue fewer shares. Although the BOJ’s ETF purchase might increase share prices, the increase in both illiquidity and downside risk limit the share price increases. Although the equity cost of capital decreases for firms with disproportionately large BOJ holdings, the cost of increased illiquidity might have wider effects for the all listed firms.

Keywords: ETFs, equity market, liquidity, market efficiency, unconventional monetary policy

JEL Classification: E52, E58, G10, G14

Suggested Citation

Chen, Zhuo and Ito, Keiichi and Yamada, Takeshi and Zhang, Bohui, Monetary Policy Through the Stock Market: Central Bank Purchase of Equity Index ETFs (September 23, 2019). Available at SSRN: https://ssrn.com/abstract=3458250 or http://dx.doi.org/10.2139/ssrn.3458250

Zhuo Chen

University of New South Wales (UNSW)

Kensington
High St
Sydney, NSW 2052
Australia

Keiichi Ito

SMBC Nikko Securities

Shin-Marunouchi Bldg
1-5-1 Marunouchi
Chiyoda-ku, Tokyo 100-6519
Japan

Takeshi Yamada (Contact Author)

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen ( email )

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