Informe de resultados

It is not unlikely that some of the impact of QE or LSAPs on the bond and equity markets occurs not when the actual purchases are made by the monetary authorities but when the purchase announcement is made or when expectations of such future purchases are formed. To examine this announcement impact, this study carried out an event study looking at the

immediate reaction of the bond and equity market yields in the UK and US to announcements relating to major QE purchases by the relevant monetary authority.

Important for the LSAPs or QE event study is that the event phase captures all announcements that have impacted LSAPs or QE expectations, and with the implicit assumption that the LSAP expectations were not affected by anything else other than the announcements. This obviously is a very strong assumption particularly factoring into consideration the prevailing financial and economic circumstances that warranted the QE in the first place, and other political events including the impending presidential elections in US at the time, all of which may have played some impacts on the financial market expectations of future policy trajectory. Needless to say that a major difficulty in isolating the signalling effect of the QE is that asset prices or yields could also have reacted to other non-LSAP or QE information around the period such as updates on the MPC and FOMC’s economic outlook and other major political events other than announcement of QE policies. In the light of this glaring limitation of the event study approach and to mitigate the risk of contamination a one day window period is used for the event study.

The one day window(s) is constructed as starting from the closing level of the day prior to the announcement to the closing level on the day of the announcement. The focus here are on the dates of official communications or releases by the Fed and BoE, which contained new

25, 2008, December 1, 2008, December 16, 2008, January 28, 2009, March 18, 2009, August 12, 2009, September 23, 2009 and the November 11, 2009 (see Table 1 for the descriptions). While for the BoE’s QE1, these are the February 11, 2009, March 5, 2009, May 7, 2009, August 6, 2009, November 5, 2009 and February 2, 2010 (see Table 2 for the descriptions).

Starting with the US, Table 8 shows the cumulative changes in the equity and bond yields following the US QE1, QE2, MEP and QE3 operations. Across the eight announcements contained in the event set for the QE1, both the US equity (S&P500) and the US Treasury 10 year bond yields declined significantly, with the equity and bond yields declining by 72 and 75 basis points, respectively. Perhaps not surprising, the decline in both the US equity and bond yields were greater following the QE1 announcements in comparison to the subsequent announcements of QE2, the MEP and US QE3 operations which to a very large extent were widely envisaged by the financial markets and thus contained little to no news or surprises for prices and yields in the financial markets. Specifically, equity and bond yields declined by 6 basis points following the US QE2 announcements, 3 basis points and 5 basis points respectively following the maturity extension programme or operation twist and by 4 basis points following the QE3 announcements.

The event study results of the US QE1 announcements appear consistent with earlier event studies from the literature of the impact of the US QE1 announcements on bond yields decline, totalling around 80bps. Furthermore, by considering the impact beyond the bond markets of the QE announcements, this study is able to broaden or generalise the findings to an imperfectly substitutable asset to bonds i.e. equity. The change in the equity and bond yields especially following the QE1 announcements may be considered as evidence of a significant signalling

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channel or mechanism for the US QE operations. Suggesting in fact that some of the impact of QE or LSAPs on the financial markets may occur not when the actual purchases are made by the monetary authorities but when the purchase announcement is made or when expectations of such future purchases are formed.

For the BoE QE announcements, again the decline in equity (FTSE100) and the UK 10 year gilt yields were highest following the QE1. The cumulative decline in the 10 year gilt yields was 44 basis point. Compared to some of the earlier event study in the literature for the UK QE1 announcements, finding of a cumulative 85 to 100 basis points decline in bond yields (using a two-day window) seems to suggest that doubling the event window appears to double the

amount by which the yields decline. This assertion is further corroborated by other studies of the impact of the UK QE1 announcements on gilt yields using a one-day window, like Meaning and Zhu (2011) and Glick and Leduc (2012) who like this study found smaller effects closer to 50 basis points. For the UK equity (FTSE100), the cumulative decline following the BoE QE1 announcements was 35 basis points. This study also considered the UK BoE QE2 and QE3 announcements impacts on the UK equity and bond yields. Generally, the effects of these later announcements were much smaller in size compared to the QE1, with yields falling by only - 5bps-7bps following the QE2 announcements and for the UK QE3 announcement by 1-3bps.

In summary, the event study of the announcement impact of the QE bond purchases reject the

null hypothesis (Ho2) as they show that the LSAPs announcements had impacted yields even

before the actual purchases of the bonds were executed by the monetary authorities. Thus confirming the existence of a signalling effect. But to the extent the yields on equity also declined following these QE announcements as expected given the imperfect substitutability doctrine or

portfolio balance mechanism strongly suggest that the signalling and portfolio balance channels are not necessarily mutually exclusive and may in fact work in tandem.

Table 8: Event Study Results for the US and UK QE announcements

US Event Study Results

Event Phase US Equity (S&P500) US Bond (10-year maturity)

QE1 -72bp -75bp

QE2 -6bp -6bp

MEP -3bp -5bp

QE3 -4bp -4bp

UK Event Study Results

UK Equity (FTSE100) UK Gilt(10-year maturity)

QE1 -35bp -44bp

QE2 -7bp -5bp

QE3 -1bp -3bp

Table 8 shows the event study results of the impact of the QE announcements on the US and UK equity and bond markets. The expected returns on each of the event day are deducted from the actual return to get the abnormal return i.e. A𝑅𝑖𝑡 =𝑅𝑖𝑡 - 𝑅𝑖⃑⃑⃑ on

each day in the event window. The abnormal return (𝐴𝑅𝑖𝑡) are then added up to get the aggregate or cumulative abnormal return

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