IMF Working Papers

Scarcity Effects of Quantitative Easing on Market Liquidity: Evidence from the Japanese Government Bond Market

By Fei Han, Dulani Seneviratne

May 9, 2018

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Fei Han, and Dulani Seneviratne. Scarcity Effects of Quantitative Easing on Market Liquidity: Evidence from the Japanese Government Bond Market, (USA: International Monetary Fund, 2018) accessed November 8, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Quantitative easing could improve market liquidity through many channels such as relaxing bank funding constraints, increasing risk appetite, and facilitating trades. However, it can also reduce market liquidity when the increase in the central bank’s holdings of certain securities leads to a scarcity of those securities and hence higher search costs in the market. Using security-level data from the Japanese government bond (JGB) market, this paper finds evidence of the scarcity (flow) effects of the Bank of Japan (BOJ)’s JGB purchases on market liquidity. Moreover, we also find evidence that such scarcity effects could dominate other effects when the share of the BOJ’s holdings exceeds certain thresholds, suggesting that the flow effects may also depend on the stock.

Subject: Asset and liability management, Banking, Bonds, Financial institutions, Financial markets, Liquidity, Monetary policy, Securities markets, Sovereign bonds, Unconventional monetary policies

Keywords: BOJ's holding, Bond market, Bonds, Europe, Global, Government bond, Japanese government bond, JGB cash market, JGB issue, JGB market liquidity, Liquidity, Market liquidity, Quantitative and qualitative monetary easing, Quantitative easing, Scarcity effects, Securities markets, Sovereign bonds, Unconventional monetary policies, WP

Publication Details

  • Pages:

    43

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2018/096

  • Stock No:

    WPIEA2018096

  • ISBN:

    9781484353677

  • ISSN:

    1018-5941

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