DOI•
Quantitative Easingand U.S. Financial Asset Returns
18 Sep 2015-Vol. 2, Iss: 3, pp 76-105
TL;DR: A comprehensive study of the unconventional monetary policy taken by the Federal Reserve since the financial crisis of 2008, specifically on the purchases of different assets by the Fed to change medium and long-term rates is presented in this article.
Abstract: . This paper is a comprehensive study of the unconventional monetary policy taken by the Federal Reserve since the financial crisis of 2008, specifically on the purchases of different assets by the Fed to change medium and long-term rates. Included in this study are the three rounds of quantitative easing, and the two rounds of Operation Twist. A study as such is needed in order to examine if the Fed’s purchases of these various long-term assets had any effect on the financial markets in the longer term perspective since the first announcement of the first round of purchase in November 2008. While there exists a variety of literature on the effects of quantitative easing on Treasuries and mortgage backed securities, there is no single study comprising of all the large scale asset purchases by the Fed, covering their effects on all major financial assets. This study is an attempt to fill this void in current literature on quantitative easing. Keywords. Unconventional Monetary Policy, Quantitative Easing, the Federal Reserve. JEL. E52, E58, G14.
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TL;DR: The authors analyzes intraday changes in firm-level equity prices around interest rate announcements to assess the transmission of U.S. monetary policy to the global economy and find that foreign firms on average are roughly as sensitive to U. S. monetary policies as U.K. firms, although also find considerable cross-sectional variation across firms.
Abstract: This paper analyzes intraday changes in firm-level equity prices around interest rate announcements to assess the transmission of U.S. monetary policy to the global economy. We document that foreign firms on average are roughly as sensitive to U.S. monetary policy as U.S. firms, although we also find considerable cross-sectional variation across firms. In particular, foreign stocks in cyclically sensitive industries show stronger responses to interest rate surprises, consistent with a demand channel of policy transmission. In addition, transmission of U.S. policy appears to be stronger to economies with fixed exchange rates. Evidence for a credit channel is weaker.
76 citations
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TL;DR: In this paper, the authors examined the quantitative impact of this program on mortgage interest rate spreads and found that a sizable portion of the decline in mortgage rates to such risks and a relatively small and uncertain portion to the program.
Abstract: The largest credit or liquidity program created by the Federal Reserve during the financial crisis was the mortgage-backed securities (MBS) purchase program. In this paper, we examine the quantitative impact of this program on mortgage interest rate spreads. This is more difficult than frequently perceived because of simultaneous changes in prepayment risk and default risk. Our empirical results attribute a sizable portion of the decline in mortgage rates to such risks and a relatively small and uncertain portion to the program. For specifications where the existence or announcement of the program appears to have lowered spreads, we find no separate effect of the stock of MBS purchased by the Federal Reserve.
69 citations
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TL;DR: In this article, the authors used data on exchange rates, foreign reserves and equity prices between April and August 2013 to analyze who was hit and why by the tapering of quantitative easing in emerging markets.
Abstract: In May 2013, Federal Reserve officials first began to talk of the possibility of tapering their security purchases. This tapering talk had a sharp negative impact on emerging markets. Different countries, however, were affected very differently. This paper uses data on exchange rates, foreign reserves and equity prices between April and August 2013 to analyze who was hit and why. It finds that emerging markets that allowed the real exchange rate to appreciate and the current account deficit to widen during the prior period of quantitative easing saw the sharpest impact. Better fundamentals (the budget deficit, the public debt, the level of reserves, or the rate of economic growth) did not provide insulation. A more important determinant of the differential impact was the size of the country's financial market: countries with larger markets experienced more pressure on the exchange rate, foreign reserves, and equity prices. This is interpreted as showing that investors are better able to rebalance their portfolios when the target country has a relatively large and liquid financial market.
62 citations
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TL;DR: The authors analyzed the joint behavior of international capital flows by foreign and domestic agents over the business cycle and during financial crises and found that gross capital flows are very large and volatile, especially relative to net capital flows.
Abstract: This paper analyzes the joint behavior of international capital flows by foreign and domestic agents -- gross capital flows -- over the business cycle and during financial crises. The authors show that gross capital flows are very large and volatile, especially relative to net capital flows. When foreigners invest in a country, domestic agents tend to invest abroad, and vice versa. Gross capital flows are also pro-cyclical, with foreigners investing more in the country and domestic agents investing more abroad during expansions. During crises, especially during severe ones, there is retrenchment, that is, a reduction in both capital inflows by foreigners and capital outflows by domestic agents. This evidence sheds light on the nature of shocks driving capital flows and helps discriminate among existing theories. The findings seem consistent with shocks that affect foreign and domestic agents asymmetrically, such as sovereign risk and asymmetric information.
49 citations
TL;DR: In this article, the authors examine several event-study test statistics that can be used to detect abnormal performance during amultiperiod event window, and demonstrate that one of the most commonly used test statistics does not, under the assumptions made, have the distribution claimed (standard normal), and thus tests using it will be biased.
Abstract: We examine several event-study test statistics that can be used to detect abnormal performance during amultiperiod event window. We demonstrate that one of the most commonly used test statistics does not, under the assumptions made, have the distribution claimed (standard normal), and thus tests using it will be biased. The magnitude of that bias is shown to increase with the length of the event window and can generally be expected to lead to excessive rejection of the null hypothesis. We also compare the relative power of alternative test statistics that are normally distributed and are straightforward to apply.
48 citations