The assessment of United States quantitative easing policy: Evidence from global stock markets

What is it about?

Most of literature on QE in recent years has focused on its effects by examining macroeconomic and financial variables via the linear regression of a mean equation. The above variables include the inflation, industrial production, GDP, CPI, bank equity value, exchange rate, interest rate, and the others. Unlike previous studies, this study uses the AR(1)-QGARCH-SGED model with a structure break to assess the performance of QE policy implemented by US via examining the impact of business cycle and the unconventional monetary policy on global stock markets for the two sub-periods (i.e., the periods of before SB and after SB) since some structure break (SB) may appear at the global stock market during the abovementioned period owing to the GFC and the subsequent QE policy being implemented by US and other countries. The unconventional monetary policy is the purchases of TS and MBS by the Federal Reserve in US. Moreover, under the framework of the parametric techniques, the long position in-sample Value-at-risk (VaR) forecasts based on the above model are calculated, and the value of VaR and the loss caused by the violation of VaR model are respectively used to explore the risk and the loss suffered by the investors in the above eight countries during the before and after SB periods.

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Why is it important?

First, the policy makers and the investors should select the QGARCH-SGED model with a structure break to examine the impact of the unconventional monetary policy on the stock markets and to further evaluate the risk and the loss they will suffer. Second, the government should implement the purchases of Treasury securities rather than the purchases of mortgage-backed securities during the crisis happening since the purchases of Treasury securities in US can affect the stock markets synchronously. Finally, the investors ought to escape the financial market immediately as the crisis happens since the investors have the lower profit or even the greater loss, and they bear the greater risk, the larger variation of risk, and the more substantial loss during the after SB period owing to the global financial crisis.

Perspectives