What are the effects of central banks' large-scale asset purchases on stock markets in the United States and Europe
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Journal Title
Journal ISSN
Volume Title
School of Business |
Master's thesis
Author
Date
2019
Department
Major/Subject
Mcode
Degree programme
Economics
Language
en
Pages
56+10
Series
Abstract
This thesis investigates the long-run relationship between stock market indexes and central banks’ quantitative easing (large-scale asset purchase) policies during and after the Financial Crisis of 2007-2008 in the United States and Europe. The methodology used in this follows Lima, Vasconselos, and Simão (2016) paper “The Quantitative Easing Effect on the Stock Market of the USA, UK, and Japan”, that is an autoregressive distributed lags (ARDL) approach. Cointegration tests are used to detect the long-term nature of the effects. The results are inconclusive for the United States data: models with money aggregates (M1, M2, M3, and monetary base) and controlling for industrial production index and government interest rate or effective exchange rate show positive long-run relationships. The total magnitude of these effects would be in the range of 30-60% of the S&P500 index value in 3014. However, using GDP (interpolated from quarterly to monthly-level) instead of industrial production index or Wu & Xia shadow rate instead of money aggregates show no relationship in between the variables and S&P500 stock market index in the United States. Hence, it cannot be concluded that there is indeed a positive long-run effect. A similar analysis was done with European data (STOXX600 stock market index excluding companies from the UK) and using Euro Zone GDP, Wu & Xia shadow rate for ECB’s monetary policy or ECB’s actual asset purchases) as control variables show no statistically significant long-run relationship. The results then indicate, that more research is needed to draw conclusions about the long-run effects of quantitative easing on stock markets.Description
Thesis advisor
Honkapohja, SeppoKeywords
quantitative easing, monetary policy, stock markets, large-scale asset purchases, central banks, Federal Reserve, European Central Bank, ECB
