Quantitative Easing and Exuberance in Government Bond Markets: Evidence from the ECB's Expanded Asset Purchase Program

Abstract

SUMMARY -This paper examines whether the ECB's Quantitative Easing (QE) policy is causing government bond prices to deviate from their fundamental value.We use a recent advance in the methodology to measure exuberant price behavior in financial time series introduced by Phillips et al. (2015). We extend this methodology and apply it to government bond prices. The results show that the QE policy substantially inflated government bond prices in Euro Area countries to such an extent that bond prices are no longer in line with the underlying fundamental value. We argue that careful monitoring is required when the QE policy is eventually reversed. The test procedure outlined in this paper provides a monitoring tool to do so.JEL-code -G12; G15; E52

Identification of Multiple Bubbles in Turkish Financial Markets: Evidence From Gsadf Approach

“…As shown in the second column, the sequential ADF unit root test provides significant evidence of footprints, namely, it supports the possibility of bubbles in only three out of eight variables in the first stage as the GSADF test rejects the null of no existence of a bubble in the bond, gold, and currency markets. Our findings regarding the existence of bubbles reinforce the results of some papers for bond markets (Lamoen et al, 2017;Huston and Spencer, 2018;Chiu and Yeh, 2019), gold markets (Zhao et al, 2015;Long et al, 2016;Pan, 2018), and currency markets (Hu and Oxley, 2017;Afşar et al, 2019;Korkmaz et al, 2016). The findings regarding the nonexistence of bubbles in equity markets contradict a few papers (Chang et al, 2016;Çağli and Mandaci, 2017;Liaqat et al, 2018;Korkmaz et al, 2016) but support Çıtak (2019) and Tasci and Okuyan (2009), who argue that since Istanbul Stock Exchange (ISE) indices do not have much depth, the lack of speculative bubble may be the result of the large and relatively rational investors' precautionary behaviors.…”

“…The answer is no for five out of eight variables, namely, the test strongly rejected the existence of bubble formations in stock (4) and CDS markets. Corroborating previous findings, the results showed evidence of bubbles in the currency, gold, and bond markets during both turmoil and tranquil periods, confirming the existing literature like Hu and Oxley (2017), Korkmaz et al (2016), Zhao et al (2015), Pan (2018), andLamoen et al (2017), etc., indicating divergence of Turkish asset prices from their market fundamentals. Furthermore, the role of gold as a safehaven was confirmed for Turkish investors during the currency and COVID-19 pandemic crises.…”

Quantitative easing and exuberance in stock markets: Evidence from the euro area

“…Although the EONIA index can also be used to this extent (see e.g. Van Lamoen et al, 2017), it has been trading flat for quite some period of time as a result of the effective lower bound. The SSR tries to approximate what the short-term interest rate would have been, if there was no effective lower bound.…”

“…Second, some studies use a similar approach and investigate asset classes that are directly targeted by the purchase programmes (e.g. Van Lamoen et al (2017)), whereas we study the effect on an asset class that is not directly targeted. The paper is therefore related to Borio and Zhu (2012), who introduce the risk taking channel of QE as the impact of monetary policy on the willingness of market participants to take risk, which influences economic decisions in the real economy.…”

Testing for Co‐explosive Behaviour in Financial Time Series

“…Pavlidis et al, 2016; Deng et al ., 2017), and bond markets (e.g. Phillips and Yu, 2011; van Lamoen, Mattheussens and Droes, 2017; Huston and Spencer, 2018). It is widely recognized that these types of bubble‐detection tests can provide very useful information for central banks, financial regulators, and investors.…”