Abstract

The Bank of Japan (BoJ) purchased equity index exchange-traded funds (ETFs), including Nikkei 225 ETFs, for over a decade and has not sold any ETFs it purchased. On March 31, 2021, the BoJ’s ETF holdings were more than 10% of the free float of the First Section of the Tokyo Stock Exchange. Primarily because the Nikkei index is price-weighted, the BoJ’s indirect holdings as a percentage of the market capitalization vary widely among individual stocks. To identify the effects of the uneven demand shocks, this paper runs instrumental-variable cross-sectional regressions of cumulative returns between September 30, 2010, a few days before the first announcement of ETF purchases, and March 31, 2021, when the BoJ terminated Nikkei 225 ETF purchases. The results suggest that the price multiplier is around 6 to 9; a 1 percentage point higher BoJ share in a stock’s market capitalization is associated with a roughly 6 to 9 percentage point higher return. The estimated multiplier is much higher than a typical estimate of 1 based on U.S. data. There is no evidence of a return reversal in the 9 months after Nikkei 225 ETF purchases ended. Various analyses, including monthly return regressions, support the analysis of cumulative returns and provide additional insights.  

Introduction

Many empirical studies find that demand for stocks influences stock prices. The literature often estimates the price multiplier, the percent change in the price of a particular stock when investors purchase 1% of the market capitalization of that stock. Gabaix and Koijen’s (2022) survey suggests that a typical estimate of the price multiplier is about 1.１ On the other hand, finance theory indicates that the impact of demand shocks on asset prices depends on the nature of demand. For instance, if demand shocks are expected to be more persistent, the impact is larger since asset prices reflect not only current but also expected demand. To contribute to this literature and the literature on unconventional monetary policy, this paper explores a unique natural experiment, the Bank of Japan’s (BoJ’s) persistent holdings of equity index exchange-traded funds (ETFs).  

 

WP049

2024.04

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