An empirical analysis of the impact of financial stress and quantitative easing on U.K. financial markets

Abstract

This thesis consists of four chapters that contribute to studies in empirical finance, macroeconomics, monetary policy and asset-pricing. In particular, this thesis examines the interaction between Quantitative Easing, asset pricing, asset volatility and financial stress. In chapter 2 the financial market impact of QE on asset pricing is analysed. The channels of QE are introduced and pricing relationships between gilts, exchange rates, corporate bonds, commercial-bank bonds and equities are examined to determine whether the gilt purchase programme was translated effectively into the pricing of other assets. This chapter finds the effects of QE are inconsistent and weak enough in scale to be lost in the turbulence of the financial crisis period. Chapter 3 creates a financial stress index of the UK to examine asset pricing in terms of risk, uncertainty and constrained financial conditions. The chapter reviews the most relevant financial stress indices and uses these precedents to create a continuous financial stress variable. Chapter 4 uses univariate and multivariate GARCH methodologies to examine asset return levels and volatility during the financial crisis and subsequent QE programme. Financial stress is modelled and the impact of QE on key stress indicators is measured. QE is found to have had a strong effect on the pricing and volatility of UK gilts, and to a lesser extent corporate bonds, however UK equities and systemic financial stress were largely unaffected. Chapter 5 explores the interaction between the market efficiency of UK equities and the business and financial cycles and whether variations in market efficiency explain the lack of impact of QE on equities. Stock return predictability is the metric through which market efficiency is judged, using both economic indicators and technical trading rules as predictors. Stock return predictability is found to be positively related to both the business and financial cycles.