Institutional Investor Portfolio Allocation, Quantitative Easing and the Global Financial Crisis

49 Pages Posted: 13 Sep 2014

See all articles by Michael Joyce

Michael Joyce

Bank of England - Monetary Analysis

Zhuoshi Liu

Bank of England - Monetary Analysis

Ian Tonks

University of Bristol - Department of Finance and Accounting

Date Written: September 12, 2014

Abstract

We examine how the Bank of England’s quantitative easing (QE) policy during the global financial crisis affected the investment behaviour of insurance companies and pension funds and whether their behaviour was consistent with the operation of the so-called 'portfolio balance channel' that has been emphasised by UK and US monetary policy makers as a key channel through which QE works. To assess the incremental impact of QE, we need some counterfactual of how the investment behaviour of institutional investors would have changed in the absence of the policy. We construct this by conditioning on variables that explain portfolio allocation but are invariant to the QE policy itself, which allows us to construct both ex-ante and ex-post counterfactuals. Our analysis of a range of data sources, including national accounts net investment data and micro-data on life insurance companies and pension funds, suggests QE led to institutional investors shifting their portfolios away from gilts towards corporate bonds relative to the counterfactual. Although analysis of the micro-data does suggest some heterogeneity in the response to QE across different institutions, the shift into corporate bonds was quite widespread. However, portfolio rebalancing by institutional investors into riskier assets seems to have been limited to corporate bonds and did not extend to equities.

Keywords: Institutional investors, asset allocation, quantitative easing, portfolio balance channel, financial crisis

JEL Classification: G11, E61, E65, C22, C23

Suggested Citation

Joyce, Michael and Liu, Zhuoshi and Tonks, Ian, Institutional Investor Portfolio Allocation, Quantitative Easing and the Global Financial Crisis (September 12, 2014). Bank of England Working Paper No. 510, Available at SSRN: https://ssrn.com/abstract=2495424

Michael Joyce (Contact Author)

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom
44 (0)207 601 4444 (Phone)

HOME PAGE: http://www.bankofengland.co.uk

Zhuoshi Liu

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

HOME PAGE: http://www.bankofengland.co.uk/research/Pages/economists/Zhuoshi-Liu.aspx

Ian Tonks

University of Bristol - Department of Finance and Accounting ( email )

Department of Finance and Accounting
15-19 Tyndalls Park Road
Bristol, BS8 1PQ
United Kingdom

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