Quantitative Easing and Exuberance in Stock Markets: Evidence from the Euro Area

42 Pages Posted: 6 Dec 2019

See all articles by Ryan Lamoen

Ryan Lamoen

De Nederlandsche Bank

Nander de Vette

De Nederlandsche Bank

Tom Hudepohl

De Nederlandsche Bank

Date Written: November 28, 2019

Abstract

In response to a prolonged period of low inflation, the European Central Bank (ECB) introduced Quantitative Easing (QE) in an attempt to steer inflation to its target of below, but close to, 2% in the medium term. This paper examines whether QE contributes to exuberance in euro area stock markets by using recent advances in bubble detection techniques (the GSADF-test). We do so by linking price developments in 10 euro area stock markets to a series of country specific macro fundamentals and QE. The results indicate that periods of QE coincide with exuberant investor behaviour, even after controlling for improving macro fundamentals.

Keywords: exuberance, asset price bubbles, unconventional monetary policy, quantitative easing

JEL Classification: G12, G15, E52, E58

Suggested Citation

Lamoen, Ryan and de Vette, Nander and Hudepohl, Tom, Quantitative Easing and Exuberance in Stock Markets: Evidence from the Euro Area (November 28, 2019). De Nederlandsche Bank Working Paper No. 660, 2019, Available at SSRN: https://ssrn.com/abstract=3498327 or http://dx.doi.org/10.2139/ssrn.3498327

Ryan Lamoen

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Nander De Vette

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Tom Hudepohl (Contact Author)

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

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