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The Bank of Japan's equity purchases and stock illiquidity

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  • El Kalak, Izidin
  • Leung, Woon Sau
  • Takahashi, Hidenori
  • Yamada, Kazuo

Abstract

Using the large-scale index-linked exchange-traded fund (ETF) purchase program of the Bank of Japan (BOJ), we examine the role of unconventional equity-based monetary policies in the market liquidity of the underlying securities. Using a large sample of Japanese stocks, we document a significant increase in stock illiquidity when a firm's ownership by the BOJ increases. Intensified ETF arbitrage activities partially mediate such effect. The increased illiquidity is concentrated among small and young firms and those whose shares are likely subject to strong buying pressure. Finally, BOJ ownership increases comovement in liquidity and reduces informational efficiency.

Suggested Citation

  • El Kalak, Izidin & Leung, Woon Sau & Takahashi, Hidenori & Yamada, Kazuo, 2023. "The Bank of Japan's equity purchases and stock illiquidity," Journal of Financial Markets, Elsevier, vol. 63(C).
    • Handle: RePEc:eee:finmar:v:63:y:2023:i:c:s138641812200060x
    DOI: 10.1016/j.finmar.2022.100770
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    Cited by:

    1. Mitsuru Katagiri & Junnosuke Shino & Koji Takahashi, 2023. "To lend or not to lend: the Bank of Japan's ETF purchase program and securities lending," BIS Working Papers 1113, Bank for International Settlements.
    2. Cohen, Lior, 2023. "The effects of the BoJ's ETF purchases on equities and corporate investment," Economic Modelling, Elsevier, vol. 129(C).

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    More about this item

    Keywords

    Bank of Japan; Monetary policy; ETF; ETF arbitrage; Stock illiquidity;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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