Soare Grigoras Bianca Ioana 939 [629005]

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QUANTITATIVE EASING

Introduction
The financial crisis from 2008 represented a shock for many financial institutions and systems ,
the entire financial market being affected by stress and uncertainty . In order to stabilize the
economy, the major central banks such as the Bank of England, The European Central Bank, the
Bank of Jap an and the Federal Reserve pursued their monetary policy through the manipulation
of the short -term nominal interest rates and pursue unconventional measures . Also, these
measures represented the central banks’ tendency to upgrade their transparency and their
communication with the general public. The monetary policy is considered to be one of the key
areas of the economy as a whole. The four major banks adopted the quantit ative easing policy on
the idea that this measure based on the large scale asset program lead to the acquisition of private
and public financial assets in the idea of recovering the economic system. Also, these banks
hoped to boost the market liquidity and therefore extend asset prices, taking into account the
minimization of the borrowing costs, costs determining a larger inclination towards investments
and consumption. The Federal Reserve seemed attracted by implementing these types of
measures such as t he quantitative easing which tended to absorb shocks and ensure the stability
of the financial market .
The quantitative easing is an unconventional monetary policy based on which banks purchase
governments or other securities. Generally, the monetary policy even the unconventional
measure – quantitative easing – is based on the control of short -term nominal interest rates that
leads to changes in assets prices and the tendency to lend, consume and invest. The quantitative
easing refers to changes in th e composition and size of a central bank’s balance sheet, being
created to ease liquidity and credit conditions. The quantitative easing policy comprises three
main categories such as the exceptional liquidity measures , the purchases of assets and the
collateral easing. This policy played a significant role in the economy starting from 2008 and it is
divided in 3 parts. The first part is QE1 which is based on purchases of mortgage -backed
securities (MBSs) and debt elements from governments -sponsored enterpr ises (GSEs). The
second part of the program is QE2 is referring to treasuries and their maturities. The third part is
QE3 based purchasing both MBSs and long term treasuries.

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QE Effects on financial markets
The first type of quantitative easing was based entirely on assets. The Fed started to sell its
holding and Treasuries and buy less liquid assets. By this change , they tried to provide more
liquidity such as T -bills to market. The idea was to reduce the so called liquidity premiums, but
taking into account the fact that the financial situation started to deteriorate, the market’s real
problem became the insolvency. The second type of QE referred to the liabilities of the Fed’s
balance sheet, the Treasury st arted borrowing in advance of its needs and depositing the excess
funds in its accounts at the central bank. Regarding the liabilities of the Fed’s balance sheet, the
bank reserves increased from about $11 billi on to $860 billion in 2008.
All the purchases and acquisitions of treasuries or mortgage -backed securities led to the “flow
effect” phenomenon based on lowering on average yields. Also, a fall in the yield curve
happened because of the quantitative easing program. The QE1 and QE2 had a great impact o n
the nominal interest rates on long assets considered safe, such as treasuries, agency bonds and
highly -rated corporate bonds. The QE1 impacts successfully the mortgage -backed securities
(MBS) rates by lowering them , while QE2 does not impact these securi ties, involving only
treasury purchases. In addition, many authors claimed in their reports that the large scale assets
purchases from QE1 determined a drop in the yields of treasuries. LSAPs alter the supplies of
long term bonds and decrease the term pre mium in long -term bond yields such as the reduction
between 30 and100 basis points for the ten -year term premium . Moreover, a decline in term
premium can also be produced by a high risk aversion of arbitrageurs. The LSAPs lead to a
stimulation of the econo mic activity because of the decrease in longer -term private borrowing
rates. The first LSAP program reduced long term treasury yields by 35 basic points and the
second program reduced them by about 45 basic points. Regarding the investors that purchase
assets, because of the quantitative easing they tried to rebalanced their portfolios in the direction
of riskier assets . In the same time, some investors decided to abandon their positions in emergent
market economies and concentration on US equity and bon d funds. The problem is that, the
rebalancing produce the appreciation of the US currency and the lowering of US bond yields.
Also, the US quantitative easing policy had a great effect toward the emerging markets such as
China, India, Indonesia or Mexico.

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The measures issued by four main central banks The Bank of Japan, the European Central Bank,
Federal Reserve or the Bank of England influenced the financial market in nine countries
belonging to CEE. The 5 year CDS closing prices in Romania, Bulgaria, Aus tria, Ukraine,
Hungary, Poland, Germany, Russia and Turkey were influenced by the ECB quantitative easing
policies. The highest effects of these policies were recorded in Bulgaria and Ukraine, while the
smallest effects were visible in Austria. In the case of Turkey, Bulgaria, Austria, Hungary,
Poland and Germany, the QE leads more to a reduction in credit risk than a rise in it and the most
efficient impact in this way is in Germany. However, in case of Romania, Ukraine and Russia,
the QE policies of the E CB led to a rise in credit risk. The credit risk of the above nine countries
is influenced by the quantitative easing policies of the Bank of England, fluctuating between
60.31% and 82.03%. The highest impact of the ECB quantitative policies was on t he sovereign
instruments from Turkey and Bulgaria , while the smallest impact was on sovereign instruments
from Ukraine and Germany. Also, the greatest reduction on credit risk has been found in
Hungary and the smallest impact in Germany. Due to the quantitati ve easing policies, the degree
of uncertainty in pricing the CDS instrument has declined. The Federal Reserve’s QE policies
recorded both increases and deteriorations in the level of credit risk, accordingly to the credit
default swap instruments. Regardin g the Bank of Japan QE policies, Ukraine is the only one of
the ten countries mentioned above, which don’t recorded a credit risk reduction. The highest
influence of the European Central Bank QE on credit risk is represented by the idea of
purchasing asset s of about £375 billion. Some economists analyzed 20 days before the event and
20 days after it, in order to show the abnormal returns. Calculating the value of the t test, in the
nine CEE countries were found significant levels of abnormal returns in diff erent period of the
study, leading to a decrease in the credit risk associated to the Romanian CDS and a growth in
the uncertainty about the right valuation of the CDS. The negative nature of the abnormal returns
for the Romanian sovereign CDS instrument a nd the decrease in values of the t te st indicate the
fact that the instrument is perceived as less risky. An evolution in the values of the squared
abnormal return represent an opposite tendency, the QE’s events leading to an increase of
uncertainty of the CDS instrument evaluation and therefore to an increase in volatility. Also, the
Bank of Japan’s QE policy triggers a decrease of the abnormal returns on the day of the
announcement in case of Romania. The only one instrument from this study which reacts
strongly but also volatile to the QE announcements is the German CDS. All in all, the most

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affected instruments to QE policies are those from Turkey, Bulgaria and Romania and the CDSs
with the low est degree of sensitivity are from Russia, Ge rmany and Austria. Moreover, t he QE
policies issued by the BOJ trigger oscillating influences between lowering and aug menting credit
risk. T he number of cases in which these policies reduce credit risk are greater than the number
of cases in which they lead to a ris e, excepting Ukraine . The biggest credit risk reduction effect
found in this study is specific to the Bulgarian sovereign CDS.
The impact of the QE on various stock market indices was in attention of Federal Reserve which
takes into consideration the expan ding or reducing the assets purchases in order to be able to
influence the labor market and inflation. Based on the event -study build on 32 GARCH type
specifications, some economists analyzed 10 days before the event and 10 days after the event,
including the calendaristic dates of a series of quantitative easing and tapering announcements.
As a result, the abnormal variance or volatility on the announcement day for DOW JONES
UTILITIES, BRAZIL BOVESPA – TOT RETURN IND, BIST NATIONAL 100, PHILIPPINE
SE I(PSE i) and TOPIX and other indices has been observed. After the first events, t he FOMC
decided to supplement the acquisition of treasuries and MBSs and to continue the QE measures
until the labor market exhibits substantial improvements. The main idea is that the impact on
these indices will have a great effect over the developed international financial markets. After the
first tapering event, the FOMC decided to reduce the purchases of MBS from 40 billion dollars
per month to 35 billion dollars per month and t o diminish the acquisition of long term treasuries
from 45 billion dollars to 40 billion dollars. After the next 4 events of this type, t he FOMC
announced again a reduction in terms of purchases of MBSs and long term Treasuries . After
many announcements of the FOMC regarding the reductions for assets purchases and Treasuries,
the last event led to r eductions in acquisitions to the point of 15 billion in MBSs and 20 billion in
Treasuries. Moreover, because of the labor market progress, the FOMC decided a further round
of tapering through which the purchases were reduced from 15 billion dollars to 10 dollars for
MBS and from 20 to 15 billion for long term treasuries. Also , on the basis of a state of economic
restoration, the Federal Reserv e announced in Jul y 2014 a new stage of QE programs reductions,
reaching 5 billion dollars for MBS and 10 billion for treasuries. After the last event from October
2014, the Federal Reserve decided to exit quantitative easing programs. As a result, i mportant
accumulations o f abnormal volatility were observed in the last 10 days before the event.

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In term of currency, the GBP values against the Australian Dollar, Brazilian Real, Canadian
Dollar, Chinese Yuan, Croatian Kuna, Czech Koruna, Euro, Hungarian Forint, Japanese Yen,
Romanian Leu, Norwegian Krone, Polish Zloty, Russian Rouble and the US Dollar between
2001 and 2014 reflect that the currency returns have similar statistical properties. Their means
and standard deviations are situated at approximately the same levels. In this case, simultaneous
regime shifts in the dynamics of fourteen GBP currency pairs can be observed. Regarding the
Euro, this unconventional monetary policy had a big in fluence on the economic activity and
inflation of the Euro area. Considering the publ ic communications, more and more financial
institutions tended to enhance the transparency of their operation because it has as results the
financial stability, credibility of the central banks and accountability of their actions. the
communication policy of a central bank affects the dynamics of various financial assets. Beine,
Janssen and Lecourt (2009) consider that certain speeches influence the exchange rate and its
volatility. Born (2011) analyzed the effect of more than more than 1000 Financial Stabi lity
Reports and oral communications, which belong to many central banks. The conclusion is that
those Reports had the potential to reduce the volatility of the stock market return. Also, the
communications issued by Fed officials influence the returns of financial assets, especially in the
emerging countries. Moreover, according to Călin (2015) the speeches delivered by officials of
the main central banks: European Central Bank, Bank of Japan, Federal Reserve and Bank of
England on a series of currency pai rs had a relevant impact on the topics of quantitative easing,
Federal Reserve’s tapering and financial stability. For example, the speech held by Governor
Jerome H. Powell on the 6th of November 2014 generated a volatility impact of 0.56. The
speeches delivered by the officials of the central banks caused the volatility for currency pair
including EUR, USD, GBP and JPY. The speech delivered by Mario Draghi on the 4th of
December 2014 induced abnormal returns that were visible in the volatil ity of 0.846153846
recorded for the EUR/ZAR currency. Also, this speech impacted the EUR/ILS and EUR/MXN
currency pairs. The speech presented by Sabine Lautenschläger on the 29th of November 2014
induced abnormal returns for the EUR/HUF, while the Loretta Mester’s speech generated
abnormal returns for the USD/PLN currency pair, leading to a volatility index value of 0.769231.
Other speeches had a great effect on the USD/SEK and USD/NOK currency pairs, recording a
volatility of 0.692308 and 0.461538. After n ew QE announcements, the sterling ERI did
depreciate by around 4%.

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Regarding the tapering and QE announcements, some stocks belonging to US real estate
companies suffered. Companies such as American Leisure Holdings Inc., Biloxi Marsh Lands
Corporation, Br esler & Reiner Inc., Asia Properties Inc., Princeton Capital, Eagle Exploration
Company, HomeFed Corporation, Kaanapali Land or Pramerica Real Estate Investors, known
various abnormal returns.
Based on the quantitative easing policy, t he covered bond purc hase program was also successful.
It led to lower market term rates and also it tended to ease funding conditions, to encoura ge
credit expansion and to improve market liquidity. Moreover, the QE policies issued by the Bank
of England led to the reduction i n guild prices of about 100 because of the asset purchases .
Another fall in gilt yields corresponded to the interest rates implied by overnight index swap
(OIS) contracts, which fell by about 10 basis points in total over the six QE events study. To the
extent that OIS rates can be used as a benchmark for default risk -free rates, it is consistent with
the main effect coming through portfolio rebalancing. A strong negative relationship can be
observed between two -day changes in zero -coupon gilt yields and th e amount of QE news in
each announcement. A regression of these suggested a fall in gilt yields of 0.62 basis points for
each additional £1 billion of unanticipated QE purchases announced. Sca ling up, the estimates
represented an impact from £200 billion o f unanticipated purchases of 1 25 basis points on yields,
divided in two: about 45 basis points on OIS rates and 80 basis points on gilt -OIS spreads. Also,
QE announcements made the sterling investment -grade corporate bond yields fell by 70 basis
points, wh ile the spreads relative to gilt yields remained broadly flat. The sterling non –
investment grade corporate bond yields fell by 150 basis points, while the spreads were by 75
basis points. This is different from the 100 basis point average fall in gilt yiel ds because of the
fact that the sterling corporate bonds have a shortage average duration. Moreover, the
international investment -grade bond yields fell by less than sterling -denominated bonds.
Regarding the stocks, the FTSE All -Share index fell after the March MPC announcement. In the
same time, the international equity prices fell, being considered that this can represent a small
positi ve UK -specific effect. After other QE announcements , UK equity prices increased , but fell
after the February 20 10 announcement.
The wider macroeconomic effects of QE are difficult to quantify. T he QE policy had a maximum
effect on the level of the real GDP, while on the annual CPI inflation it has a peak effect.

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Inflation expectations are expected to increase in respo nse to the monetary stimulus associated
with QE. QE raised the level of real GDP by 1/2% to 2% and increased inflation by between 3/5
to 1/2 percentage points, suggesting that the effects of QE were economically significant. The
effects can be compared wit h the cut in Bank Rate that would be required to produce a similar
rise in CPI inflation. The central banks suggested that a 100 basis point cut in Bank Rate
increases CPI inflation by about 1/2 percentage point after 18 to 24 months. As a result, the
effect of QE was equivalent to a 150 to 300 basis point cut in Bank Rate, meaning that it was a
significant reduction. In addition, the QE policy helped to reduce the weight that agents placed
on outcomes of persistent low inflation, though a number of other e xternal factors, influencing
inflation over that period. The quantitative easing policy had a positive effect on credit flow
expansion. Taking into account the liquidity into the interbank market, it is needed to be larger
for a boost in bank lending. What is interesting in case on bank market is that the small banks
benefited more from the quantitative easing policy than the stronger ones. Also, one of the effect
of QE measures belonging to four major central banks is related to the returns of credit defau lt
instruments, and thus on credit risk.
Conclusion
As a result, the monetary policy decisions taken by the Federal Reserve influenced the dynamics
of a numerous set of global stock market indices. In case of stock market indices, the QE events
and announc ements determined abnormal variances or volatilities and also, the first pure tapering
announcement generated important movements in abnormal variances. In general, the results
were most significant for those indices belonging to countries with mature fina ncial markets.
Considering the Fed’s quantitative easing attack on interest rate spreads, it seemed to have been
successful from one point of view. Speeches that covered ideas such as: reforms in central
clearing, bankruptcy and the evolution of the US economy have been great impacted by QE
policies. As a result, the volatility has been influenced the most by statements announcing details
about quantitative easing, tapering or financial stability. In terms of tapering initiatives, these
have a feeble eff ect on the development of the real estate market.
All in all, it is difficult to measure directly the effects of monetary policy measures such as QE
and so estimates of those effects are highly uncertain. Even so, the QE policy was therefore
effective in h elping the UK economy avoid a deeper recession and deflation because without the

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QE, around the world, especially in UK would have been larger declines in real GDP during
2009 and CPI inflation would have been low or even negative.
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