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What are the effects of Large Scale Asset Purchases on asset prices in the US?

Kotsbak, Anders; Zakariassen, Lars Theodor
Master thesis
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MSc0122016.pdf (2.775Mb)
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http://hdl.handle.net/11250/2442475
Utgivelsesdato
2016
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Samlinger
  • Master of Science [1116]
Sammendrag
In this thesis we research the effects of the Federal Reserve’s Large Scale Asset

Purchase programs on asset prices in the United States, mainly stock prices and

long term interest rates. First, an event study is employed to capture the effects of

the announcements regarding LSAP, which gives an indication on what effects

the LSAP programs had on asset prices. In addition, we employ a Vector

Autoregression and a Vector ErrorCorrection

model to analyse the actual effects

of the asset purchases done through the LSAP.

From the event study we find that LSAP announcements have a statistically

significant negative impact on five, ten and thirty year treasury yields. The results

indicate a downward shift of around 0.4% for these yields. These findings are in

line with what other studies have found, as well as what is expected from theory.

The effects of LSAP announcements on the S&P500 index are not significant,

which could be due to the fact that LSAP programs are not directly affecting the

S&P500 index, and thus it is not captured in the short estimation window in the

event study.

From the Vector Autoregression we find that an onestandard

deviation shock to

the Securities held outright by the Federal Reserve (measure of LSAP) has a

positive effect on the S&P500 index of about 1.5% in the first few months, before

the effect declines back towards equilibrium after about a year. For ten year

treasury yields we find that an onestandard

deviation shock to Securities held

outright by the Federal Reserve results in a positive response of about 0.10%,

before it moves back to equilibrium after around a year.

The results from the Vector ErrorCorrection

model is similar to the results from

the Vector Autoregression model, with the most noteworthy difference being that

the effects appears to be more permanent.

The positive reaction on the ten year treasury yields due to a shock in Securities is

not in line with what we would expect, and what other studies have found.

The reason for this could be that we have somehow misspecified our models, or

that a more complex model that opens up for structural restrictions is better suited

for this analysis.

i
Beskrivelse
Masteroppgave(MSc) in Master of Science in Finance - Handelshøyskolen BI, 2016
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Handelshøyskolen BI

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