Quantitative Easing and Equity Prices: Evidence from the ETF Program of the Bank of Japan

Abstract

Since the introduction of its quantitative and qualitative easing program in 2013, the Bank of Japan has been increasing its holdings of Japanese equity through large-scale purchases of index-linked ETFs, to lower risk premiums. We exploit the cross-sectional heterogeneity of the supply shock to identify a positive and persistent impact on stock prices, consistent with a portfolio balance channel. The evidence suggests that long-run demand curves for stocks are downward sloping with unitary price elasticity. We show that the purchases of ETFs tracking the price-weighted Nikkei 225 generate pricing distortions relative to a value-weighted benchmark.

Received April 13, 2018; editorial decision July 18, 2019 by Editor Thierry Foucault. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.