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Institutional investor portfolio allocation, quantitative easing and the global financial crisis

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  • Joyce, Michael

    () (Bank of England)

  • Liu, Zhuoshi

    () (Bank of England)

  • Tonks, Ian

    () (University of Bath)

Abstract

We examine how the Bank of England’s quantitative easing (QE) policy during the global financial crisis affected the investment behaviour of insurance companies and pension funds and whether their behaviour was consistent with the operation of the so-called 'portfolio balance channel' that has been emphasised by UK and US monetary policy makers as a key channel through which QE works. To assess the incremental impact of QE, we need some counterfactual of how the investment behaviour of institutional investors would have changed in the absence of the policy. We construct this by conditioning on variables that explain portfolio allocation but are invariant to the QE policy itself, which allows us to construct both ex-ante and ex-post counterfactuals. Our analysis of a range of data sources, including national accounts net investment data and micro-data on life insurance companies and pension funds, suggests QE led to institutional investors shifting their portfolios away from gilts towards corporate bonds relative to the counterfactual. Although analysis of the micro-data does suggest some heterogeneity in the response to QE across different institutions, the shift into corporate bonds was quite widespread. However, portfolio rebalancing by institutional investors into riskier assets seems to have been limited to corporate bonds and did not extend to equities.

Suggested Citation

  • Joyce, Michael & Liu, Zhuoshi & Tonks, Ian, 2014. "Institutional investor portfolio allocation, quantitative easing and the global financial crisis," Bank of England working papers 510, Bank of England.
  • Handle: RePEc:boe:boeewp:0510
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    References listed on IDEAS

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    Cited by:

    1. Arito Ono & Kosuke Aoki & Shinichi Nishioka & Kohei Shintani & Yosuke Yasui, 2016. "Long-term interest rates and bank loan supply: Evidence from firm-bank loan-level data," Bank of Japan Working Paper Series 16-E-2, Bank of Japan.
    2. Dietrich Domanski & Hyun Song Shin & Vladyslav Sushko, 2017. "The Hunt for Duration: Not Waving but Drowning?," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 65(1), pages 113-153, April.
    3. Bubeck, Johannes & Habib, Maurizio Michael & Manganelli, Simone, 2018. "The portfolio of euro area fund investors and ECB monetary policy announcements," Journal of International Money and Finance, Elsevier, vol. 89(C), pages 103-126.
    4. Itay Goldstein & Jonathan Witmer & Jing Yang, 2018. "Following the Money: Evidence for the Portfolio Balance Channel of Quantitative Easing," Staff Working Papers 18-33, Bank of Canada.
    5. Berdin, Elia & Pancaro, Cosimo & Kok Sørensen, Christoffer, 2016. "A stochastic forward-looking model to assess the profitability and solvency of European insurers," SAFE Working Paper Series 137, Leibniz Institute for Financial Research SAFE.
    6. Cormac Cawley & Marie Finnegan, 2019. "Transmission Channels of Central Bank Asset Purchases in the Irish Economy," Economies, MDPI, Open Access Journal, vol. 7(4), pages 1-25, September.
    7. Romanos Priftis & Lukas Vogel, 2016. "The Portfolio Balance Mechanism and QE in the Euro Area," Manchester School, University of Manchester, vol. 84(S1), pages 84-105, September.
    8. Iris Biefang-Frisancho Mariscal, 2017. "The impact of quantitative easing on aggregate mutual fund flows in the UK," Working Papers 20171704, Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol.
    9. Abeer Reza & Eric Santor & Lena Suchanek, 2015. "Quantitative Easing as a Policy Tool Under the Effective Lower Bound," Discussion Papers 15-14, Bank of Canada.
    10. Muhammad Ali Nasir & Alaa M. Soliman & Muhammad Shahbaz, 0. "Operational aspect of the policy coordination for financial stability: role of Jeffreys–Lindley’s paradox in operations research," Annals of Operations Research, Springer, vol. 0, pages 1-25.
    11. Shogbuyi, Abiodun & Steeley, James M., 2017. "The effect of quantitative easing on the variance and covariance of the UK and US equity markets," International Review of Financial Analysis, Elsevier, vol. 52(C), pages 281-291.
    12. Cezar, Rafael & Silvestrini, Maéva, 2021. "Impact of the ECB Quantitative Easing on the International Investment Position," International Economics, Elsevier, vol. 165(C), pages 241-263.
    13. Lojschova, Adriana, 2017. "Did quantitative easing boost bank lending? The Slovak experience," MPRA Paper 79567, University Library of Munich, Germany.
    14. Rafael Cezar & Maéva Silvestrini, 2018. "Impact of the ECB Quantitative Easing on the French International Investment Position," Working papers 701, Banque de France.
    15. Fatouh, Mahmoud & Markose, Sheri & Giansante, Simone, 2021. "The impact of quantitative easing on UK bank lending: Why banks do not lend to businesses?," Journal of Economic Behavior & Organization, Elsevier, vol. 183(C), pages 928-953.
    16. Ono, Arito & Aoki, Kosuke & Nishioka, Shinichi & Shintani, Kohei & Yasui, Yosuke, 2018. "Long-term interest rates and bank loan supply: Evidence from firm-bank loan-level data," HIT-REFINED Working Paper Series 43, Institute of Economic Research, Hitotsubashi University.
    17. Tim A Kroencke & Maik Schmeling & Andreas Schrimpf, 2015. "Global Asset Allocation Shifts," BIS Working Papers 497, Bank for International Settlements.
    18. LUPU, Radu & CALIN, Adrian Cantemir, 2014. "Co-Movements Of Regime Shifts In Gbp Currency Pairs Around Boe Quantitative Easing Announcements," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 18(3), pages 89-101.

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    More about this item

    Keywords

    Institutional investors; asset allocation; quantitative easing; portfolio balance channel; financial crisis;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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