The portfolio balance channel: an analysis on the impact of quantitative easing on the US stock market

Imran Shah, Francesca Schmidt-Fischer, Issam Malki

Research output: Working paper

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Abstract

This paper provides empirical evidence on the pass-through of quantitative easing (QE) on equity returns in the United States (US). The methodology mimics the programme’s impact on investors’ required returns for financial assets through the QE portfolio balance channel. This analysis of monetary policy involves using a VAR model, simulating a reduction in the share of sovereign bonds as part of central bank purchases. The findings suggest that QE caused a significant reduction in the equity risk premium (ERP) for the S&P 500. This equates to an increase in equity prices of 9.6% and acts as evidence for an active portfolio rebalancing of private sector individuals into risky assets following QE. The findings of the paper also suggest that the impact of a monetary policy expansion results in varying effects, while an expansionary policy has a stronger positive effect on equity prices with QE than without. Furthermore, we test for the presence of structural breaks in the VAR model. Firstly, using a multiple structural breaks approach, we find evidence of regime shifts and secondly accounting for the shifts in the conditional mean leads to similar conclusions as found earlier.
Original languageEnglish
Place of PublicationBath, U. K.
PublisherDepartment of Economics, University of Bath
Publication statusPublished - 1 Aug 2018

Publication series

NameBath Economics Research Working Papers
No.74/18

Fingerprint

Stock market
Quantitative easing
VAR model
Equity prices
Monetary policy
Financial assets
Pass-through
Equity risk premium
Assets
Sovereign bonds
Empirical evidence
Central bank
Methodology
Purchase
Regime shift
Portfolio rebalancing
Structural breaks

Keywords

  • equity risk premium, regime shifts, quantitative easing, portfolio balance channel, equity returns

Cite this

Shah, I., Schmidt-Fischer, F., & Malki, I. (2018). The portfolio balance channel: an analysis on the impact of quantitative easing on the US stock market. (74/18 ed.) (Bath Economics Research Working Papers; No. 74/18). Bath, U. K.: Department of Economics, University of Bath.

The portfolio balance channel: an analysis on the impact of quantitative easing on the US stock market. / Shah, Imran; Schmidt-Fischer, Francesca; Malki, Issam.

74/18. ed. Bath, U. K. : Department of Economics, University of Bath, 2018. (Bath Economics Research Working Papers; No. 74/18).

Research output: Working paper

Shah, I, Schmidt-Fischer, F & Malki, I 2018 'The portfolio balance channel: an analysis on the impact of quantitative easing on the US stock market' Bath Economics Research Working Papers, no. 74/18, 74/18 edn, Department of Economics, University of Bath, Bath, U. K.
Shah I, Schmidt-Fischer F, Malki I. The portfolio balance channel: an analysis on the impact of quantitative easing on the US stock market. 74/18 ed. Bath, U. K.: Department of Economics, University of Bath. 2018 Aug 1. (Bath Economics Research Working Papers; 74/18).
Shah, Imran ; Schmidt-Fischer, Francesca ; Malki, Issam. / The portfolio balance channel: an analysis on the impact of quantitative easing on the US stock market. 74/18. ed. Bath, U. K. : Department of Economics, University of Bath, 2018. (Bath Economics Research Working Papers; 74/18).
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