Prediction of Quantitative Easing Policy Effect on the U.S. Stock Market Using ARIMA Model

Abstract

The rapid spread of the coronavirus impacted the global financial market dramatically. A “rush for cash” - the eager demand for liquidity only - that suspended financial markets and endangered to make an already dreadful situation much worse was spurred by the sudden contraction and intense concern about the future consequence of the virus. To minimize the economic loss due to the COVID-19 pandemic, the Federal Reserve has a bunch of policy tools to maintain the credit flow in the market. These included substantial mortgage-backed and government-backed securities purchases as well as lending to households, businesses, participants in the financial market, and governments at different level. The Fed also initiated purchase of debt securities on a wide scope, which is an effective resort to combat economic crisis. In this paper, effect of the increased money supply on financial assets in stock market will be evaluated, revealing the impact of the aggressive expansionary monetary policy on the stock market performance through applying the autoregressive integrated moving average (ARIMA) models. The process of using ARIMA model to predict the stock market will be illustrated. Published stock data are obtained from S&P500 and M2 data from Board of the Federal Reserve System. Results obtained from the selected model revealed that the un-disciplined monetary policy had a tremendous positive impact on the stock market.