Quantitative Easing and Financial Risk Taking: Evidence from Agency Mortgage Reits

41 Pages Posted: 8 Jul 2020

See all articles by W. Scott Frame

W. Scott Frame

Federal Reserve Bank of Dallas

Eva Steiner

Penn State Smeal College of Business

Date Written: June, 2020

Abstract

An emerging literature documents a link between central bank quantitative easing (QE) and financial institution credit risk-taking. This paper tests the complementary hypothesis that QE may also affect financial risk-taking. We study Agency MREITs – levered shadow banks that invest in guaranteed U.S. Agency mortgage-backed securities (MBS) principally funded with repo debt. We show that Agency MREIT growth is inversely related to the Federal Reserve’s Agency MBS purchases, reflecting investor portfolio rebalancing. We also find that these institutions increased leverage during the later stages of QE, consistent with “reaching for yield” behavior. Agency MREITs seem to concurrently adjust their liquidity and interest rate risk profiles.

JEL Classification: E58, G21, G23, G28

Suggested Citation

Frame, W. Scott and Steiner, Eva Maria, Quantitative Easing and Financial Risk Taking: Evidence from Agency Mortgage Reits (June, 2020). Available at SSRN: https://ssrn.com/abstract=3645596 or http://dx.doi.org/10.24149/wp2020

W. Scott Frame (Contact Author)

Federal Reserve Bank of Dallas ( email )

2200 N Pearl Street
Dallas, TX 75201
United States
214-922-6984 (Phone)

Eva Maria Steiner

Penn State Smeal College of Business ( email )

University Park, PA 16802
United States

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