Page 83

AD ALTA

JOURNAL OF INTERDISCIPLINARY RESEARCH

EFFECTS OF QUANTITATIVE EASING ANNOUNCEMENTS ON EQUITIES: EU EVIDENCE

LEOS SAFAR,

JOZEF GLOVA,

ALENA ANDREJOVSKA

JAKUB SOPKO

Technical University of Košice, Letná 9, 04001 Košice, Slovak
republic
email:

leos.safar@tuke.sk,

jozef.glova@tuke.sk,

alena.andrejovska@tuke.sk,

jakub.sopko@tuke.sk

This research was supported by VEGA project No. 1/0430/19.

Abstract: In this paper we examine effects of the Quantitative easing (QE) related
statements made by the European Central Bank (ECB) on major equity indices in the
Europe (EU). We consider days, when announcements had been made, as events for
the event-study. We approach this methodology with aim to calculate excess returns
on particular announcement day for representative indices in the old continent.
Admitting complexity of those statements, and difficulty to isolate effects linked only
to QE related information, we analysed statements individually, to be able to
extrapolate deviations more accurately. Results indicate positive excess returns (above
average performance over previous 60 days) on indices in average following
especially information linked to prolongation or expansion of existing QE programme.

Keywords: Quantitative easing, Quantitative tightening, Equity markets, Event-study.

1 Introduction

Once the crisis fully took place in 2007 and 2008, respectively,
standard monetary policy instruments become inadequate, or
performed scantily, which lead central banks to introduce non-
standard measures in order to fulfil their mandate (for purposes
of this research, we will be dealing only with high profile form
of unconventional monetary policy (UMP) - so called
quantitative easing or QE). Reason for this decision lies upon the
fact that the QE is the most significant instrument among the
other UMP’s instruments considering volume and spectrum of
assets included (de Haan et al., 2015).

The main objective of this work is to determine manner and
magnitude in which information about high profile instrument of
unconventional monetary policy – QE – affected equity markets
in after-crisis period. We accept broad evidence of large and
persistent effects of the QE on the fixed income securities, and
various effects on macroeconomic indicators, hence we
contribute to existing literature by attempt to quantify effects of
the QE on the equity markets in the EU from short-term
perspective. We argue, that proper explanation and examination
of relationship between the QE linked information and the equity
markets should reflect to profitable positioning or effective
hedging during possible next periods, where such instruments
should take place.

Delivorias (2015) describes QE simply as “an unconventional
form of monetary policy where a central bank creates new
money to buy financial assets, like government bonds.” The term
– QE – was firstly used in line with Japan’s situation that
followed real-estate bubble burst, and deflationary pressures in
1990s. With interest rates at the zero-lower bound (ZLB), the
Bank of Japan (BoJ) decided to boost cash reserves of banks by
purchasing particular assets – government bonds – from banks.
Main idea was, that providing cash to banks will support lending
across the market and consequently extenuate deflationary
pressures, after banks will achieve required level of cash
reserves. Logically, balance sheet of the BoJ expanded
significantly. Analogically, similar programmes were introduced
by the Bank of England (BoE), the Federal Reserve (FED), and
the ECB.

Compared to the FED, the ECB reacted to crisis moderately,
considering volumes of purchases and scale of assets included,
also with respect to timing of launching the QE, which was
delayed significantly in comparison to the FED (see e.g.
Hausken and Ncube, 2013). Even though, there were early
programmes operated by the ECB, which are recognized as
unconventional monetary policy instruments. First UMP
programme – long-term refinancing operation (LTRO) – started
in early 2008 and was followed by other programmes such as

outright monetary transactions (OMT), covered bond purchase
programme (CBPP), targeted long-term refinancing operation
(TLTRO) and asset backed purchase programme (ABPP), while
those were all oriented on very specific assets, subjects or
transactions, therefore, their effects in macro point of view were
limited. However, in this paper we specifically aim to investigate
the effects caused by announcements linked to these particular
programmes regarding to initial (short-term) markets reaction.

After years of running above stated programmes, Governing
Council of the ECB realized that there is no sign of substantial
recovery, with subdued inflation and very moderate pace of
economic growth. Considering the experience from the BoJ, the
BoE, and the FED, the ECB finally approached the asset
purchase programme (APP). After a severe drop in inflation
rates and medium-term inflation expectations during 2014
(Urbschat and Watzka, 2017; Mestan et al., 2020), the APP was
announced on 22nd January, 2015, and started officially in
March 2015 with expected duration to September 2016, as of
monthly pace of purchases at €60 billion (bn), €1.1 trillion (tn)
in total. The APP is part of package of measures that also
includes TLTRO and includes all purchase programmes under
which the private sector securities and the public sector
securities are purchased to address the risks of a too prolonged
period of low inflation over the medium term. The APP consists
of corporate sector purchase programme (CSPP), public sector
purchase programme (PSPP), asset-backed securities purchase
programme (ABSPP) and third covered bond purchase
programme (CBPP3).

Instead of following given outlook for duration of this
programme, governing council announced in March 2016
extending “size and duration” of the programme to €80 bn
monthly of asset purchases till December 2016, because of
“subdued inflationary pressures, and moderate pace of economic
growth”. Again, in December 2016 Mario Draghi announced
extending the programme till December 2017, with decreasing
volume of purchases to €60 bn (from April 2017 onwards),
because of same reasons. Even this deadline was extended, with
the QE continuing till September 2018 with tapered monthly
pace of €30 bn. On the meeting in the June 2018 Governing
Council of the ECB decided to keep €15 bn of monthly
purchases from September 2018 to December 2018, and finally,
quit the programme. In order to examine market reactions
strictly to policy announcements, further easing in extremely
volatile market environment after the COVID-19 is excluded
from our sample.

Additionally, we consider gradual tapering and normalization of
monetary policy along with shrinking the bank’s balance sheet
as an inevitable consequence of the QE. We argue, that tapering
and balance sheet unwinding (quantitative tightening – QT)
linked effects should be taken into consideration as effects of
consequences of the QE.

2 Literature review

We find across the existing literature, that mainstream research
examining the QE implications is oriented on bond yields. To be
more concrete, common ground among the authors is, that the
QE lowered both government and corporate bonds’ yields
persistently and significantly. Especially Joyce et al. (2012)
provides the wide-spectral and deep literature analysis. After
describing “base point” from which the UMP is launched,
authors explain impact of the QE on the domestic demand, the
equities and the yields in theory. Authors also contribute to
consensus found among other studies, that the QE is effective
with respect to lowering long-term yields (Gagnon et al., 2011;
Ihrig et al., 2012). On the other hand, Xing (2018) express some
warning, that “persistently low long-term bond yields increase
the probability and magnify the impacts of balance sheet crises.”
Kiley (2018) then suggests, that such declines in long-term
interest rates further stimulated spending and supported the

- 83 -