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Bank of Japan's ETF purchase program and equity risk premium: a CAPM interpretation

Author

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  • Mitsuru Katagiri
  • Koji Takahashi
  • Junnosuke Shino

Abstract

In this paper, we investigate the effects of the Bank of Japan's (BOJ) exchange-traded fund (ETF) purchase program on equity risk premia. We first construct a unique panel dataset for the amount of individual stock that the BOJ has indirectly purchased in the program. Then, utilizing the cross-sectional and time-series variations in purchases associated with the BOJ's policy changes, the empirical analysis reveals that: (i) the BOJ's ETF purchases instantaneously support stock prices on the days of purchases, and (ii) the instantaneous positive effects on stock prices, combined with the countercyclical nature of the BOJ's purchases, have decreased the market beta and coskewness of Japanese stocks, thus leading to an economically significant decline in risk premia.

Suggested Citation

  • Mitsuru Katagiri & Koji Takahashi & Junnosuke Shino, 2022. "Bank of Japan's ETF purchase program and equity risk premium: a CAPM interpretation," BIS Working Papers 1029, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1029
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    References listed on IDEAS

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    1. Jagannathan, Ravi & Wang, Zhenyu, 1996. "The Conditional CAPM and the Cross-Section of Expected Returns," Journal of Finance, American Finance Association, vol. 51(1), pages 3-53, March.
    2. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2011. "The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(2 (Fall)), pages 215-287.
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    4. Lettau, Martin & Maggiori, Matteo & Weber, Michael, 2014. "Conditional risk premia in currency markets and other asset classes," Journal of Financial Economics, Elsevier, vol. 114(2), pages 197-225.
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    7. Andrea Barbon & Virginia Gianinazzi, 2019. "Quantitative Easing and Equity Prices: Evidence from the ETF Program of the Bank of Japan," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 9(2), pages 210-255.
    8. Shirota, Toyoichiro, 2018. "Evaluating the Unconventional Monetary Policy in Stock Markets : A Semi-parametric Approach," Discussion paper series. A 322, Graduate School of Economics and Business Administration, Hokkaido University.
    9. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2011. "The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 43(2 (Fall)), pages 215-287.
    10. Andrea Barbon & Virginia Gianinazzi, 2019. "Quantitative Easing and Equity Prices: Evidence from the ETF Program of the Bank of Japan," Swiss Finance Institute Research Paper Series 19-55, Swiss Finance Institute.
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    Citations

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    Cited by:

    1. Han, Fei, 2024. "The impact of demographic change on the natural rate of interest in Japan," Japan and the World Economy, Elsevier, vol. 69(C).
    2. Cohen, Lior, 2023. "The effects of the BoJ's ETF purchases on equities and corporate investment," Economic Modelling, Elsevier, vol. 129(C).
    3. 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.
    4. Guo, Qi & Huang, Shao’an & Wang, Gaowang, 2024. "Stabilizing the financial markets through communication and informed trading," Journal of Financial Markets, Elsevier, vol. 69(C).
    5. Guo, Qi & Huang, Shao'an & Wang, Gaowang, 2022. "Stabilizing the Financial Markets through Informed Trading," MPRA Paper 115470, University Library of Munich, Germany.

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    More about this item

    Keywords

    large-scale asset purchases (LSAP); ETF purchase program; capital asset pricing model (CAPM); Bank of Japan;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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