Quantitative Easing and Asset Prices

Research Proposal for 2017 SEINFORMS Conference Researcher:  James P. WinderAssociate Professor of Professional PracticeRutgers Business School100 Rockafeller RoadPiscataway, NJ... [ view full abstract ]

Research Proposal for 2017 SEINFORMS Conference

1. Researcher:

    

   James P. Winder

   Associate Professor of Professional Practice

   Rutgers Business School

   100 Rockafeller Road

   Piscataway, NJ 08854

    

   jpwinder@business.rutgers.edu

   848-445-2996

    

2. Questions for research: How Did the Fed’s Three QE Programs Affect Pacific Basin Currencies, Interest Rates, and Stock Markets?  Can US monetary policy destabilize other financial systems? 

    

   Commentators wrote throughout the financial crisis that the liquidity created by quantitative easing drove assets prices so high in the US that money managers were forced to “chase return” in emerging market countries. Essentially risk-adjusted rates of return were too low.  Investors did not receive adequate compensation for the risks they were taking because of the need to show return to clients.

    

   My project will determine the extent to which the Fed’s three QE programs caused interest rates to be lower, and equity markets and exchange rates to be stronger than they would have been in the absence of the extraordinary US monetary policy.  

    

   I will use rolling 4-week averages of weekly data so that I have an adequate number of data point for my estimations. The source of the data is Bloomberg.

    

   As a secondary area of research, I will assess the effects of QE on countries with different types of currency regime, as determined by the IMF’s Annual Report on Exchange Arrangements.

    

    

3. General Model Formulation.

    

   There are three equations I will estimate for a group of selected countries.

    

1. ln(FCUR) =  β₀ + β₁ ln(FED) + β₂ (ln i_A – ln i_$)  + β₃ (ln y_A – ln y_$) + β₄  (ln Π_A – ln Π_$)  

    

   FCUR = FX value of Asian Currency.

    

   A subscript = Asian country.

    

   $ subscript = US.

   FED = a.) the size of the Fed’s balance sheet and             b.)  Fed holdings of marketable securities  

    

   i = short-term or long-term interest rate

   y = real GDP

   Π = rate of inflation.

    

   Real GDP, inflation, and interest rates are included as control variables, because these are often used to explain currency values.. 

    

    

2. ln(FEQU) =  β₀ + β₁ ln(FED) + β₂ (ln i_A – ln i_$)  + β₃ (ln y_A – ln y_$) + β₄  (ln Π_A – ln Π_$)

    

   FEQU = Asian country equity market, main market index.

    

   The same control variables are used because they have an influence on inward and outward capital flows.

    

    

3. ln(FI) =  β₀ + β₁ ln(FED) + β₂ (ln i_$)  + β₃ (ln y_A – ln y_$) + β₄  (ln Π_A – ln Π_$)

    

   FI = Foreign country interest rate.

    

    

1. Countries to be Analyzed.

    

   Japan, Korea, Taiwan, Philippines, Mexico, Chile, and, Australia.