Abstract
ABSTRACTA structural time series model is estimated and tested to examine the effect of quantitative easing (QE) on US stock prices. The model is estimated by maximum likelihood in a Time-varying parametric (TVP) framework, using the S&P 500 index as the dependent variable and the Fed’s balance as an explanatory variable in addition to the unobserved components accounting for the behaviour of variables that do not appear explicitly in the equation. The results show that QE had a sizeable, but not exclusive, effect on stock prices and that stock prices were also affected by other missing variables and cyclical movements. Several explanations are presented for the rise of the US stock market in the post-QE period, particularly since the election of Donald Trump.
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