Event Study of Quantitative Easing 2 and 3

Open Access
Hoffman, Chloe Jeanne
Area of Honors:
Bachelor of Science
Document Type:
Thesis Supervisors:
  • James R. Tybout, Thesis Supervisor
  • Russell Paul Chuderewicz, Honors Advisor
  • Event Study
  • Quantitative Easing
  • Monetary Policy
The Great Recession in the United States started in December 2007 and concluded in June 2009, with the economy still in shambles. Numerous root causes linked the lax regulations and market conditions that spawned complacency and excessive risk taking behaviors. As we approach the 10-year anniversary of the end of the crisis and with some economist predicting a potential recession in the next 18 months, it is important to look back retrospectively to analyze measures taken by the Fed and to judge their efficacy. This thesis was inspired by two event studies on Quantitative Easing: one by Gagnon, Raskin, Remache, and Sack (2010) and one by Krishnamurthy and Vissing-Jorgensen (2011). I applied a blend of the methodologies used in these two papers to additional dates for QE2 as well the entirety of QE3, which neither paper addressed. Ultimately, the purpose of this thesis was to determine whether or not various channels impacted financial variable yields during QE2 and QE3, with the hope of informing future policy decisions when faced with a recession. The results of this study found that yield changes during QE3 were mostly positive, showing that this round of easing was the least effective and even theoretically unnecessary. This research also confirmed the presence of a strong safety premium channel in QE2, meaning a Treasury-only purchase policy is inadequate since the yield reduction does not flow to riskier assets such as MBS. My thesis also found that with a signaling channel present in QE2 but not QE3, the Fed needs to give reasonable timelines when undertaking Quantitative Easing at the onset of the announcement and to reiterate them every meeting.