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Scarcity and Spotlight Effects on Liquidity and Yield: Quantitative Easing in Japan

Author

Listed:
  • Loriana Pelizzon

    (SAFE Goethe University Frankfurt and Ca'Foscari University of Venice (pelizzon@safe.uni-frankfurt.de))

  • Marti G. Subrahmanyam

    (Leonard N. Stern School of Business, New York University (msubrahm@stern.nyu.edu))

  • Reiko Tobe

    (Waseda University (r.tobe@aoni.waseda.jp))

  • Jun Uno

    (Waseda University (juno@waseda.jp))

Abstract

We investigate the determinants of the term structures of market liquidity and bond yield in the case of the Quantitative Easing ( QE) programs implemented by the Bank of Japan (BoJ). We distinguish between two opposing effects of QE on the liquidity of Japanese Government Bonds, the "scarcity effect," which is gradually manifested as a negative impact on liquidity, due to the shrinkage in the available supply of bonds; and the "spotlight effect," which induces an immediate improvement in liquidity, reflecting BOJ's massive demand. Between 2011 and 2016, we find that government bonds show an improvement in liquidity through the spotlight effect, but also experience a deterioration in liquidity through the scarcity effect. As for the yield, both the spotlight and scarcity effects work in the same direction (i.e., they raise bond prices) against theoretical expectation. Illiquidity caused by scarcity amplifies the yield decline rather than adding to the illiquidity premium.

Suggested Citation

  • Loriana Pelizzon & Marti G. Subrahmanyam & Reiko Tobe & Jun Uno, 2018. "Scarcity and Spotlight Effects on Liquidity and Yield: Quantitative Easing in Japan," IMES Discussion Paper Series 18-E-14, Institute for Monetary and Economic Studies, Bank of Japan.
  • Handle: RePEc:ime:imedps:18-e-14
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    File URL: https://www.imes.boj.or.jp/research/papers/english/18-E-14.pdf
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    References listed on IDEAS

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    Cited by:

    1. Hattori, Takahiro, 2019. "Do liquidity enhancement auctions improve the market liquidity in the JGB market?," Economics Letters, Elsevier, vol. 183(C), pages 1-1.

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    More about this item

    Keywords

    Sovereign Bonds; Quantitative Easing; Market Liquidity; Scarcity; Spotlight;
    All these keywords.

    JEL classification:

    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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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