Stock Market Response to Quantitative Easing: Evidence from the Novel Rolling Windows Nonparametric Causality-in-Quantiles Approach


OLASEHINDE WILLIAMS G. O., Olanipekun I., Özkan O.

Computational Economics, vol.64, no.2, pp.947-977, 2024 (SCI-Expanded) identifier

  • Publication Type: Article / Article
  • Volume: 64 Issue: 2
  • Publication Date: 2024
  • Doi Number: 10.1007/s10614-023-10450-y
  • Journal Name: Computational Economics
  • Journal Indexes: Science Citation Index Expanded (SCI-EXPANDED), Social Sciences Citation Index (SSCI), Scopus, IBZ Online, International Bibliography of Social Sciences, ABI/INFORM, EconLit, INSPEC, zbMATH
  • Page Numbers: pp.947-977
  • Keywords: Nonparametric causality-in-quantiles, Quantitative easing, Rolling windows, Stock market, USA
  • Istanbul Gelisim University Affiliated: No

Abstract

The US Federal Reserve has been using quantitative easing as an unconventional monetary policy tool for providing liquidity and credit-market facilities to banks, and undertaking large-scale asset purchases in periods of crisis. This study carefully examines whether the US stock market has been responsive to the use of quantitative easing over time. A major contribution of this study to the extant literature is the introduction of the novel rolling windows nonparametric causality-in-quantiles approach to studying the reaction of the stock market to quantitative easing. This approach provides a means of investigating the time-varying causality between the variables across quantiles. The standard nonparametric causality-in-quantiles test results show that stock market performance is significantly predicted by quantitative easing, except at very low and very high levels of stock returns (volatility). The rolling windows nonparametric causality-in-quantiles test results indicate that the causal effect of quantitative easing on stock market volatility and returns becomes pronounced during periods of crisis. The reactions are most significant in periods corresponding to the Asian financial crisis, the global financial crisis and the COVID-19 pandemic outbreak. Overall, the causal effect of quantitative easing on both stock market returns and volatility changes through time; the effect on stock market returns is also greater than on stock market volatility.