Analyzing Federal Reserve asset purchases: From whom does the Fed buy?

Journal of Banking & Finance 52 (2015) 230–244

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Journal of Banking & Finance journal homepage: www.elsevier.com/locate/jbf

Analyzing Federal Reserve asset purchases: From whom does the Fed buy? Seth Carpenter a, Selva Demiralp b, Jane Ihrig a,⇑, Elizabeth Klee a a b

Board of Governors of the Federal Reserve System, Washington DC, USA Koc University, Istanbul, Turkey

a r t i c l e

i n f o

Article history: Received 19 October 2013 Accepted 27 April 2014 Available online 24 June 2014 JEL Classification: E52 E58 Keywords: Unconventional monetary policy Large-scale asset purchases Portfolio reallocation

a b s t r a c t Asset purchases have become an important monetary policy tool of the Federal Reserve in recent years. To date, most studies of the Federal Reserve’s asset purchases have tried to measure the interest rate effects of the purchases, and several provide evidence that these purchases do have important effects on longer-term market interest rates. The theory of how asset purchases work, however, is less well developed. Some of the empirical studies point to ‘‘preferred habitat’’ models in which investors do not have the same objectives, and therefore prefer to hold different types and maturities of securities. To study this more closely, we exploit Flow of Funds data to assess the types of investors that are selling to the Federal Reserve and their portfolio adjustment after these sales, which could provide a view to the plausibility of preferred habitat models and the transmission of unconventional monetary policy across asset markets. We find that the Federal Reserve is ultimately buying from only a handful of investor types, primarily households (which includes hedge funds), with a different reaction to changes in Federal Reserve holdings of longer-term versus shorter-term assets. Although not evident for all investors, the key participants are shown to rebalance their portfolios toward more risky assets during this period. These results can be interpreted as supporting, at least in part, the preferred habit theory and the view that the monetary policy transmission is working across asset markets. Published by Elsevier B.V.

1. Introduction Asset purchases and sales (‘‘asset programs’’) have become an important tool of the Federal Reserve in recent years. The intent of the asset programs to date is to put downward pressure on longer-term interest rates in order to provide additional monetary policy accommodation when further reductions in the federal funds rate are constrained by the zero lower bound. Whether and how these tools of monetary policy are effective are critical questions for the economics profession. To date, most studies of the Federal Reserve’s asset programs have tried to answer whether these actions are effective at lowering longer-term interest rates and try to calibrate the interest rate effects of the policies. Several papers, such as Gagnon et al. (2011), D’Amico and King (2013), Krishnamurthy and Vissing-Jorgensen (2011), Li and Wei (2013), Wright (2012) and Ihrig et al. (2012) provide evidence that the asset programs do have important ⇑ Corresponding author. Tel.: +1 2024523372. E-mail addresses: [email protected] (S. Carpenter), [email protected] (S. Demiralp), [email protected] (J. Ihrig), [email protected] (E. Klee). http://dx.doi.org/10.1016/j.jbankfin.2014.04.029 0378-4266/Published by Elsevier B.V.

effects in lowering longer-term market interest rates in the U.S.; Kapetanios et al. (2012) find evidence for the UK as well. These lower interest rates resulting from asset purchases, in turn, lead to a moderate boost to the economy, as shown by Chen et al., 2012. These studies employ a variety of techniques, from event studies, to time-series regression, to modeling the yield curve, to dynamic-stochastic general equilibrium models of the yield curve. Although some look to explicit measures of changes in the supply of longer-term securities to the markets as explanatory variables, they do not, in general, rely on a theoretical model as a basis for the estimation. Indeed, the general theory of how asset purchases and sales by the central bank works is less well developed. Vayanos and Vila (2009) and Li and Wei (2013) point to ‘‘preferred habitat’’ models to provide a rationale. Preferred habitat models assume that there is a variety of investor types who have dissimilar objectives and, therefore, prefer to hold different types and maturities of securities. In such models, buying longer-term securities can affect longer-term rates because some investors are less willing to substitute into other assets. As a result, the prices of longer-term assets

S. Carpenter et al. / Journal of Banking & Finance 52 (2015) 230–244

increase when the central bank decreases the supply of those assets relative to other assets.1 In this paper, we exploit Flow of Funds data (described in the next section) to identify which types of investors are selling to the Federal Reserve during four different asset programs: the large-scale asset purchase program (LSAP) that took place from November 2008 to June 2010 (LSAP1); LSAP2, from November 2010 to June 2011; the maturity extension program (MEP), from September 2011 to December 2012; and the reinvestment program for proceeds of maturing and prepaying mortgage-backed securities, from August 2010 to December 2012. Then, knowing how these investors adjust the remainder of their portfolio provides some guidance on how monetary policy is transmitted across asset classes. Uncovering which investors are willing to sell securities when the Federal Reserve conducts purchases could offer some support for preferred habitat models. More generally, understanding how Federal Reserve purchases affect the portfolios of privatesector investors may provide insight into how the tool works in various settings. In addition, evaluating investor preferences could also provide some guidance as to how an unwinding of the Federal Reserve’s balance sheet may affect financial markets and hence shed some light onto the likely market response as the Federal Reserve exits from its accommodative policy stance. Overall, our results suggest that the Federal Reserve is ultimately interacting with only a handful of investor types. Households (the group that includes hedge funds)2, broker-dealers, and insurance companies appear to be the largest sellers of Treasury securities when the Federal Reserve buys these securities. Households, investment companies, and to a lesser extent, pension funds, are the largest sellers of MBS when the Federal Reserve buys. With both the Federal Reserve’s Treasury and MBS purchases, our results suggest that households are the largest, ultimate seller. Moreover, different investor types appear to react dissimilarly to changes in Federal Reserve holdings of longer-term versus shorter-term assets. This latter result is relevant for considering the maturity extension program (MEP) under which the Federal Reserve sold shorter-dated Treasury securities and bought long-term Treasury securities. Overall, these results can be interpreted as supporting, at least in part, the preferred habitat theory. Focusing on those investors that are participating in the Federal Reserve’s asset programs, additional investigation shows how these investor types’ portfolios adjust in response, which provides insight into the transmission of the Federal Reserve’s asset purchases to broader financial markets. In particular, our results suggest that ‘‘households’’ – one of the investor classes most likely to sell to the Federal Reserve – reallocate their portfolios coincident with Federal Reserve purchases. Federal Reserve purchases of Treasury securities and MBS induce households to shift toward corporate bonds, commercial paper, and municipal debt and loans. In addition, when pension funds sell MBS to the Federal Reserve, they then shift their portfolio toward repurchase agreements, or very shortterm assets. This evidence of shifting investors from one asset class to another points to a credible monetary policy transmission channel for the effects of asset purchases on broader financial markets. The remainder of this paper is as follows. We start with a discussion of the data. Then we focus on how the major investors and the Federal Reserve are interacting within the asset programs. From there we see how these investors rebalance their portfolios. Finally, we conclude.

1 Polkovnichenko (2005) finds similar evidence for households of ‘‘preferred habitat’’ behavior, or preferences over portfolios that deviate from traditional portfolio choice models. Lu (2013) also discusses new theoretical bases for quantitative easing. 2 As will be discussed in more detail in the Data section, households not only include ‘‘true’’ households but also hedge funds and a few other investor types.

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2. Data We focus our analysis on the low-frequency relationship of how securities move between the Federal Reserve and the ultimate counterparties. The Flow of Funds data published by the Federal Reserve Board provides, at a quarterly frequency, an accounting of holdings of different asset types by various entities.3 The data are measured in billions of dollars as a level at the end of the period, and are not seasonally adjusted. There are two noteworthy limitations of the data, although the impact of these limitations are likely small. First, the actual asset purchases and sales—‘‘open market operations’’—that the Federal Reserve conducts are performed with the primary dealers as counterparties.4 However, the primary dealers may be, to some extent, a conduit between the Federal Reserve and the ultimate holder of the security. Specifically, for the primary dealers to be able to sell a substantial amount of securities to the Federal Reserve, they would have to buy those securities in the market. The purchases by the dealers could be done in anticipation of Federal Reserve purchases, however; most programs have lasted several months to over a year. As such, a low-frequency analysis over a long period seems appropriate for uncovering the ultimate counterparties to the Federal Reserve. Second, for the sample covered in our analysis, there is not a series for agency MBS separate from that for agency debt. Consequently, our analysis focuses on changes in the holdings in both together for the different entity types. While this construction may bias our results to some degree, over this period, most of the Federal Reserve’s changes in holdings were of agency MBS, and as reported on selected GSE filings, the amount of agency MBS outstanding is about twice that of agency debt. We use data beginning in 1991:Q1 and ending in 2012:Q3 for our analysis. This long sample ensures that the results are not skewed by recent, unusual actions by the Federal Reserve. That said, to confirm that the results are indicative of the asset programs, we analyze a shorter sample as well. We focus on the nine largest investor types in the data: the rest of the world, depository institutions (DIs), insurance companies, investment funds, pension and retirement funds, state and local governments, broker-dealers, households and the Federal Reserve. Table 1 shows summary statistics on these categories. These investors represent over 80 percent of Treasury and agency securities holdings. Much attention in popular press has been given to the amount of U.S. debt, especially federal debt that is held by foreign investors. As a result, the ‘‘rest of the world’’ category is of particular interest. Because the asset programs have resulted in a large increase in the quantity of reserve balances in the banking sector, understanding if DIs have sold assets to the Federal Reserve sheds some light on the evolution of banks’ balance sheets over the course of the programs. Finally, it should be noted that the ‘‘household’’ category is perhaps a bit different than the label might imply. Given the conventions and information available in generating the Flow of Funds data, hedge funds are usually included in the ‘‘household’’ category.5 As a result, instead of reflecting the actions

3 Flow of Funds data and information about the data are available at http:// www.federalreserve.gov/releases/z1/. 4 The list of primary dealers is available on the website of the Federal Reserve Bank of New York. http://www.newyorkfed.org/markets/pridealers_current.html. A general discussion of open market operations is available at http://www.newyorkfed.org/ markets/openmarket.html. 5 The Flow of Funds description of the household sector states ‘‘the values for the household sector are calculated as residuals. That is, amounts held or owed by the other sectors are subtracted from known totals, and the remainders are assumed to be the amounts held or owed by the household sector. . ..because of the residual nature of the household sector, assets of entities for which there is no data source, such as domestic hedge funds, private equity funds, and personal trusts, are included in this sector.’’ See http://www.federalreserve.gov/apps/fof/DisplayTable.aspx?t=l.100

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Table 1 Summary statistics, $ millions. Variable

Mean

SD

Median

Min

Max

Obs.

(1990Q1–2006Q4) Rest of world Depository institutions Insurance companies Investment funds Pension funds State and local Brokers and dealers Households Federal Reserve Treasury holdings Federal Reserve MBS holdings

1,066,589 240,703 180,111 225,862 332,755 211,367 (15,935) 594,824 471,115 2035

495,736 80,880 41,793 39,811 23,448 59,681 37,374 182,203 166,862 2411

1,049,348 236,655 182,389 226,767 337,700 212,647 (7236) 569,861 442,910 465

415,674 110,310 111,517 118,165 279,333 99,000 (148,588) 263,525 217,899 0

2,126,178 391,595 250,513 303,560 367,066 302,227 67,409 908,530 778,915 6524

68 68 68 68 68 68 68 68 68 68

2007Q1–2012Q3 Rest of world Depository institutions Insurance companies Investment funds Pension funds State and local Brokers and dealers Households Federal Reserve Treasury holdings Federal Reserve MBS holdings

3,745,561 204,000 211,593 663,015 587,049 319,458 70,475 638,628 976,091 629,525

1,082,920 83,891 42,036 199,408 157,126 21,059 104,361 319,369 450,604 511,122

3,680,309 196,595 222,014 692,774 604,997 327,610 87,092 620,653 779,632 918,393

2,196,987 100,871 141,864 278,314 379,603 277,340 (139,335) 201,952 475,921 0

5,445,299 327,762 263,755 951,831 805,917 345,763 203,769 1,202,337 1,664,660 1,282,889

23 23 23 23 23 23 23 23 23 23

of ‘‘true’’ households which may be less sophisticated investors, this group in fact contains some of the more sophisticated investors who may be expected to arbitrage across markets. Fig. 1 displays end of year holdings of Treasury securities and agency securities by investor type from 1990 to 2013. One can see that the Federal Reserve’s holdings increased dramatically after the onset of the financial crisis. Treasury holdings increased nearly 250 percent, while MBS holdings went from zero to about $1 trillion. To begin to think about from whom the Federal Reserve purchased its securities, one can decompose the change in each investor-type’s holdings over the asset program period into two pieces: the change in holdings resulting from a change in the volume of securities outstanding and the change in holdings resulting from a change in the investor type’s market share. The first effect will capture, for example, the large increase in Treasury debt outstanding over the period that, to a first approximation, is independent from the LSAP programs. The second effect provides some signal for from whom the Federal Reserve obtained its securities. That is, for either Treasury or agency securities, M, and investor type, i, we have their holdings change as follows.

where b is the investor’s average market share over the time for which the change in holdings is measured. Fig. 2 plots the change in each investor’s market share, bi, for Treasuries and agency securities from 2007 to 2013. For Treasury securities, the Federal Reserve’s market share rose about 20 percentage points over the LSAP period. This occurred while pension and retirement funds, state and local governments, insurance companies, depository institutions and households reduced their market shares. For MBS and agency debt holdings, the Federal Reserve’s market share rose about 40 percentage points, while depository institutions, state and local governments, pension funds, insurance companies and households reduced their market shares. For both Treasury and MBS, it seems that the households are the key investor type that is responding the LSAPs.

These changes in market shares, however, are merely a stylized fact that is evident in the data. We now turn to the econometric analysis for more formal evidence of the effect of LSAPs on these investor’s securities holdings. Besides looking at the change in total Treasury holdings, we also consider the Federal Reserve’s holdings of shorter-term or longer-term Treasury securities. These data come from the Federal Reserve Board’s H.4.1 publication, which reports the Federal Reserve’s balance sheet on a weekly basis. The data used in the analysis are as of the quarter-end date, the same basis as the other Flow of Funds data. 3. Federal Reserve purchases from whom This section walks through two general specifications to determine which investors sell securities to the Federal Reserve. The first is our baseline analysis, using an OLS specification, and the second is a modification to allow for panel estimation. We discuss each in turn. 3.1. Baseline specification We begin with a series of regressions in which the dependent variables reflect changes in the asset holdings of each of the eight largest investor types, and the key independent variable is the change in the Federal Reserve’s holdings of securities. We estimate two regressions. First, changes in each investor type’s holdings of Treasury securities; and changes in each investor’s holdings of mortgage-backed securities (MBS). Explaining these changes are an autoregressive term as well as the change in the Federal Reserve’s holdings of that particular security, after controlling for changes in the outstanding issuance of that security. That is,

DðInv estorij Þt ¼ a þ b2 DðInv estorij Þt1 þ b3 DðFedj Þt þ b4 DðOutstanding j Þt þ et

ð1Þ

where i is an index for the investment type that indicates the rest of the world, depository institutions (DIs), insurance companies, investment funds, pension and retirement funds, state and local governments, brokers and dealers, and households (HH); j indicates the security type, Treasury securities or MBS, such that D(Investorij) is the change in investor i’s nominal holdings of security j; D(Fedj) is the change in the Federal Reserve’s nominal holdings of security j;

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Treasury Securiy Holdings 6000

Rest of World

5000

Federal Reserve

Pension and Rerement funds

4000

$ Billions

Households 3000 Investment funds 2000 State and local government 1000 Depository instuons

-1000

2012

2010

2011

2009

2008

2006

2007

2004

2005

2003

2001

2002

2000

1998

1999

1996

1997

1995

1994

1993

1991

1992

1990

0 Insurance companies

Brokers and dealers

Agency Security Holdings 2000

Rest of World

1800 Federal Reserve 1600 Pension and Rerement funds

1400 $ Billions

1200 Households 1000 Investment funds

800 600

State and local government

400 Depository instuons 200 Insurance companies 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

0

Brokers and dealers

Fig. 1. Securities holdings by investor type.

and D(Outstandingj) is the change in the total outstanding nominal amount of security j. Finally, t is the time index at the quarterly frequency. Table 2a shows the results from this baseline specification for Treasury securities. Each column in Table 2a refers to an investor type, as specified in equation (1). The tables split the sample in two in order to obtain (pre-2007) and (post-2007) estimates; this construct allows us to differentiate the Federal Reserve asset purchase period.6 As such, we modify our specification and investigate DðInv estor ij Þt ¼ ð1  D2007 Þ þ a1  DðInv estor ij Þt1  ð1  D2007 Þþ

a2  DðFedj Þt  ð1  D2007 Þ þ a3  DðOutstanding j Þt  ð1  D2007 Þ þ D2007 þb1  DðInv estor ij Þt1  ðD2007 Þ þ b2  DðFedj Þt  ðD2007 Þ þb3  DðOutstanding j Þt  ðD2007 Þ þ et

where the dummy variables D2007 allow us to differentiate between the pre-crisis and the post-crisis period. Our results in Table 2a suggest that while before 2007, Federal Reserve purchases had little effect on investor allocations, post2007, the impact was significant. In particular, households (which include hedge funds), broker-dealers, and insurance companies tend to be the ultimate sellers when the Federal Reserve buys 6 A sample that extends earlier than 1991 would have involved changes in the definition of investor types, without increasing the information on the period of asset purchases.

Treasury securities (row 7). In addition, because we have a lagged dependent variable, the long-run effect needs to account for the b3 partial adjustment. As a result, we also report 1b (row 9) for the 2 post-2007 period. The estimate suggests that, over a long period, each $100 billion of Fed purchases translates into an over $500 million reduction in household holdings of the asset, a remarkably high elasticity. Those for other investor groups are much smaller, suggesting somewhat less elastic portfolios. As households (or hedge funds) tend to be dynamic and responsive investors almost by definition, that they adjust to shocks faster and more completely than broker-dealers, and even more so than insurance companies. In economic terms, as reported in the bottom panel of Table 1, we interpret these results to suggest that for LSAP1’s $300 billion purchase of Treasury securities, the Federal Reserve ultimately purchased about $170 billion (roughly 60 percent) of these securities from households. This finding is consistent with Fig. 2 that indicates that households reduced their market share the most in the LSAP time period. Broker-dealers reduced their holdings by about $40 billion and insurance companies reduced their holdings a bit. The broker-dealer result is somewhat surprising, as the broker-dealers should in principle be simply a conduit and our market share estimation suggested their holdings actually went up. However, dealers changed the composition of asset holdings in their balance sheets over this period, and this phenomenon may influence our results to some degree.

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100

Esmated change in Treasury market share

80

percentage points

60 40 20 0 -20 -40 -60

Esmated change in MBS market share 50 40 30

percentage points

20 10 0 -10 -20 -30 -40 Fig. 2. Change in market share.

Importantly, the Federal Reserve expanded, shrank, and maintained the size of its portfolio over the course of the financial crisis. In particular, very early in the financial crisis, the Federal Reserve ran down its holdings of bills as it offset the increase in reserves of depository institutions from the expansion of Federal Reserve lending. In contrast, the LSAPs involved purchases of longer-term Treasury securities, and the MEP had both sales of short-dated securities and purchases of longer-dated ones. The bill episode in particular can help us isolate the effect of portfolio rebalancing effectively by adding an interactive dummy variable which is negative when the Federal Reserve reduced its bill holdings; Table 1(b) reports the result from this specification. These results are similar to those reported above, and seem to suggest that households respond the most significantly to reductions in the Federal Reserve’s portfolio pre-crisis, while insurance companies responded the most significantly to the runoff in the Federal Reserve’s bill holdings that occurred as part of the crisis response. Building on the bill results, to assess further whether some investors view different types of assets as more or less substitutable than others, we explore the sensitivity of our results by analyzing separately longer-term and shorter-term Treasury securities. In Table 3a, we decompose the holdings of the Federal Reserve’s Treasury securities into shorter-term (row 3) and

longer-term (row 4) securities. Our findings suggest that different investors are on the opposite sides of the transaction for bills than for coupon securities. Consistent with the results in Table 2b, precrisis, households responded to Federal Reserve purchases by paring back holdings of shorter-dated securities, while the rest of the world shrank longer-dated coupon holdings. Post-crisis, investment funds and insurance companies were the investor types that absorbed the decline in the Federal Reserve’s holdings of bills, while households, broker-dealers, depository institutions, and insurance companies tended to be the ultimate sellers in transactions with the Federal Reserve. While Federal Reserve purchases do appear to affect investors’ holdings of securities, it is also likely that investors also adjust portfolios in response to overall changes in the composition of Treasury debt outstanding. To investigate this proposition more closely, Table 2b reports the results of a specification that includes lagged longer-term Treasury debt as a share of total marketable Treasury debt outstanding as an independent variable. Investors could potentially shift portfolios closer to the market basket in response, in order to achieve a market neutral portfolio, or conversely, could substitute into scarcer securities, which would presumably have a higher return. The results suggest that investment companies lean towards the market maturity distribution, adjusting towards the

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S. Carpenter et al. / Journal of Banking & Finance 52 (2015) 230–244 Table 2a Holdings of Treasury Securities (1991.Q1–2012.Q3). I D(Rest of the World) Pre-2007 1. Constant 2. Lagged Dependent Variable 3. D(Treasury_Fed)t 4. D(Treasury_Outstanding)t Post 2007 5. Constant 6. Lagged Dependent Variable 7. D(Treasury_Fed)t 8. D(Treasury_Outstanding)t 9. Memo: b3/1  b2 10. Adjusted R2 11. Number of Observations

II D(DIs)

III D(Insurance)

9250.25 0.97 0.26** 2.60 0.16 0.16 0.26** 6.28

1442.50 0.62 0.19* 1.70 0.26 1.19 0.07** 2.88

1644.81 1.55 0.56** 3.68 0.15 1.41 0.01* 1.71

32071.66 1.08 0.10 1.25 0.13 1.53 0.37** 4.09 0.15 0.64 87

7869.26 0.92 0.13 1.00 0.03 0.77 0.07* 1.88 0.03 0.15 87

D(Treasury_Fed) Implications of coefficient estimates (in $billions) LSAP1 $300 LSAP2 $600

76.69 0.05 0.54** 4.48 0.02** 2.00 0.01** 2.32 0.04 0.40 87

IV D(Investment)

534.46 0.28 0.15** 1.95 0.07 0.36 0.05** 3.44 11692.89 0.58 0.10 0.48 0.15 1.21 0.07 0.71 0.17 0.21 87

V D(Pension and Retirement) 451.59 0.25 0.14 1.12 0.09 0.78 0.00 0.06 451.36 0.12 0.47** 3.39 0.00 0.38 0.03** 2.83 0.01 0.46 87

VI D(State and Local Gov’t) 811.14 0.48 0.37* 1.81 0.05 0.33 0.00 0.40 1012.46 0.24 0.08 0.62 0.01 0.78 0.01 0.46 0.01 0.02 87

VII D(Brokers and Dealers

VIII D(HH)

4042.49 0.68 0.44** 4.75 0.37 0.69 0.14** 2.19

3779.30 0.32 0.05 0.35 1.34 1.10 0.35** 5.18

29623.99 1.14 0.23* 1.72 0.13** 1.95 0.17* 1.71 0.10 0.22 87

17670.10 0.36 0.04 0.32 0.57** 3.87 0.23 1.36 0.59 0.24 87

D(Insurance) b3  D(Treasury_Fed)

D(Brokers and Dealers b3  D(Treasury_Fed)

D(HH) b3  D(Treasury_Fed)

$6 $12

$39 $78

$171 $342

t-Statistics (based on Newey–West heteroskedasticity consistent standard errors) are below the coefficient estimates. * Indicates significance at 90% level of significance. ** Indicates significance at 95% level of significance.

Table 2b Holdings of Treasury Securities (1991.Q1–2012.Q3).

Pre-2007 1. Constant 2. Lagged Dependent Variable 3. D(Treasury_Fed)t 4. D(Treasury_Fed)t  DNegative 5. D(Treasury_Outstanding)t Post 2007 6. Constant 7. Lagged Dependent Variable 8. D(Treasury_Fed)t 9. D(Treasury_Fed)t  DNegative 10. D(Treasury_Outstanding)t 11. Adjusted R2 12. Number of Observations

I D(Rest of the World)

II D(DIs)

III D(Insurance)

IV D(Investment)

18332.12** 2.76 0.29** 2.72 0.75 1.11 9.75** 3.17 0.25** 6.09

1444.31 0.53 0.19 1.64 0.26 1.02 0.36 0.66 0.07** 2.84

1725.60 1.31 0.56** 3.65 0.15 1.23 0.14 0.43 0.01* 1.71

118.64 0.05 0.16** 1.99 0.03 0.13 0.65 1.00 0.05** 3.45

10626.99 0.22 0.06 0.86 0.06 0.58 0.40 0.95 0.42** 3.56 0.66 87

3414.41 0.26 0.16 1.13 0.06** 2.02 0.18** 2.11 0.04 1.07 0.15 87

6073.51* 1.77 0.52** 6.24 0.00 0.11 0.10** 3.24 0.02** 3.09 0.42 87

14917.41 0.45 0.05 0.24 0.08 0.86 0.47** 2.15 0.13 1.01 0.22 87

V D(Pension and Retirement) 1161.10 0.53 0.14 1.11 0.03 0.19 0.56 1.29 0.00 0.10 1679.27 0.32 0.47** 3.23 0.01 0.61 0.03 0.85 0.04** 2.60 0.45 87

VI D(State and Local Gov’t)

VII D(Brokers and Dealers

169.65 0.08 0.37* 1.79 0.04 0.30 0.99 1.50 0.00 0.37

819.67 0.14 0.44** 4.74 0.67 1.35 3.00** 3.05 0.14** 2.26

4568.35 0.79 0.12 0.72 0.02 1.10 0.06 1.33 0.01 0.80 0.02 87

32932.23 0.91 0.23* 1.74 0.12 1.51 0.05 0.25 0.18 1.58 0.21 87

VIII D(HH)

15373.37 1.55 0.06 0.44 0.27 0.25 11.37** 3.17 0.35** 5.45 33342.59 0.41 0.02 0.13 0.72** 4.49 0.84 1.41 0.13 0.60 0.26 87

t-Statistics (based on Newey–West heteroskedasticity consistent standard errors) are below the coefficient estimates. DNegative is a dummy variable that is one when D(Treasury_Fed) < 0. * Indicates significance at 90% level of significance. ** Indicates significance at 95% level of significance.

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Table 3a Holdings of treasury securities (1991.Q1–2012.Q3).

Pre-2007 1. Constant 2. Lagged Dependent Variable 3. D(Treasury_Fed_Bill)t 4. D(Treasury_Fed_Coupon+TIPS)t 5. D(Treasury_Outstanding)t Post 2007 6. Constant 7. Lagged Dependent Variable 8. D(Treasury_Fed_Bill)t 9. D(Treasury_Fed_Coupon+TIPS)t 10. D(Treasury_Outstanding)t 11. Adjusted R* 12. Number of Observations

I D(Rest of the World)

II D(DIs)

25075.52** 3.35 0.26** 2.67 1.13 1.25 2.51** 2.52 0.18** 3.47

2046.74 0.68 0.20 1.66 0.29 1.24 0.16 0.39 0.07** 2.62

17103.04 0.38 0.08 1.03 0.44 1.02 0.08 0.75 0.40** 3.68 0.65 87

690.43 0.06 0.15 1.06 0.12 1.47 0.06* 1.76 0.05 1.34 0.14 87

III D(Insurance)

IV D(Investment)

911.67 0.56 0.55** 3.51 0.18 1.58 0.02 0.11 0.01 1.18

327.03 0.15 0.16* 1.85 0.12 0.47 0.07 0.24 0.06** 3.91

5422.06** 1.98 0.59** 6.70 0.12** 4.71 0.00 0.23 0.02** 3.48 0.42 87

19616.04 0.64 0.07 0.35 0.74** 3.34 0.06 0.66 0.14 1.14 0.25 87

V D(Pension and Retirement) 925.89 0.50 0.14 1.09 0.14 1.01 0.01 0.03 0.00 0.15 1817.78 0.36 0.48** 3.29 0.04 0.95 0.01 0.65 0.04** 2.70 0.44 87

VI D(State and Local Gov’t)

VII D(Brokers and Dealers

1049.84 0.53 0.35* 1.72 0.16 0.80 0.27 1.41 0.01 1.04

7229.38 1.15 0.45** 4.73 0.51 0.63 0.15 0.19 0.15** 2.07

3898.78 0.67 0.11 0.71 0.05 1.14 0.02 1.06 0.01 0.71 0.02 87

37605.62 1.11 0.23* 1.81 0.27 1.37 0.10 1.39 0.19* 1.74 0.20 87

VIII D(HH)

18534.44* 1.80 0.15 1.03 2.42* 1.78 1.27 0.90 0.42** 5.18 38198.13 0.52 0.03 0.29 0.42 0.76 0.75** 5.05 0.13 0.64 0.26 87

t-Statistics (based on Newey–West heteroskedasticity consistent standard errors) are below the coefficient estimates. * Indicates significance at 90% level of significance. ** Indicates significance at 95% level of significance.

Table 3b Holdings of Treasury Securities (2001.Q1–2012.Q3).

Pre-2007 1. Constant 2. Lagged dependent variable 3. D(Treasury_Fed_Bill)t 4. D(Treasury_Fed_Coupon+TIPS)t 5. D(Treasury_Outstanding)t 6. Sharet1 Post 2007 7. Constant 8. Lagged dependent variable 9. D(Treasury_Fed_Bill)t 10. D(Treasury_Fed_Coupon+TIPS)t 11. D(Treasury_Outstanding)t 12. Sharet1 13. Adjusted R2 14. Number of observations

I D(Rest of the World)

II D(DIs)

III D(Insurance)

IV D(Investment)

1935.74 0.15 0.21** 2.18 1.01 1.12 3.58** 3.69 0.16** 3.57 4450.35** 3.12

5073.83 0.74 0.16 1.36 0.23 0.87 0.12 0.32 0.08** 2.87 1136.61 1.43

1249.01 0.42 0.55** 3.40 0.18 1.55 0.01 0.05 0.01 1.12 53.56 0.16

298.11 0.08 0.16* 1.83 0.12 0.45 0.10 0.28 0.06** 4.05 99.36 0.17

13663.95 0.13 0.08 0.96 0.44 0.84 0.08 0.66 0.41** 3.34 237.92 0.05 0.66 87

25472.54 1.03 0.22 1.42 0.18** 3.07 0.06* 1.68 0.04 1.21 1629.24 0.78 0.15 87

4816.60 0.69 0.59** 4.88 0.12** 3.26 0.00 0.23 0.02** 2.87 43.06 0.13 0.40 87

128627.30** 2.53 0.01 0.10 1.00** 4.34 0.02 0.22 0.20* 1.72 7634.70** 2.96 0.34 87

V D(Pension and Retirement)

VI D(State and Local Gov’t)

1490.87 0.48 0.14 1.05 0.14 0.97 0.03 0.11 0.00 0.09 89.96 0.17

10284.99** 2.03 0.23 1.27 0.18 1.02 0.01 0.06 0.01 0.44 1382.87** 2.58

6408.50 0.62 0.45** 3.31 0.02 0.40 0.01 0.51 0.03** 2.19 536.53 0.91 0.43 87

15138.26 1.16 0.22* 1.72 0.01 0.21 0.01 0.72 0.00 0.11 1347.86* 1.81 0.10 87

VII D(Brokers and Dealers

VIII D(HH)

903.48 0.09 0.46** 4.76 0.47 0.57 0.49 0.57 0.16** 2.05 1305.42 0.89

11151.42 0.77 0.11 0.76 2.15 1.58 2.28 1.51 0.45** 5.81 4633.92** 2.44

94647.28* 1.83 0.25** 2.27 0.39* 1.85 0.08 1.02 0.22** 2.02 3933.21 1.54 0.20 87

198628.00 1.06 0.14 0.95 0.91 0.99 0.87** 3.61 0.03 0.11 10239.06 1.10 0.28 87

t-Statistics (based on Newey–West heteroskedasticity consistent standard errors) are below the coefficient estimates. Share is defined as the sum of Coupons and TIPS as a fraction of total outstanding Treasury issuance. * Indicates significance at 90% level of significance. ** Indicates significance at 95% level of significance.

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S. Carpenter et al. / Journal of Banking & Finance 52 (2015) 230–244 Table 4a Holdings of Treasury Securities (1991.Q1–2012.Q3).

Pre-2007 1. Constant 2. Lagged Dependent Variable 3. D(Treasury_Fed_Bill)t 4. D(Treasury_Fed_Bill)t DNegative 5. D(Treasury_Fed_Coupon+TIPS)t 6. D(Treasury_Outstanding)t Post 2007 7. Constant 8. Lagged Dependent Variable 9. D(Treasury_Fed_Bill)t 11. D(Treasury_Fed_Coupon+TIPS)t 12. D(Treasury_Outstanding)t 13. Adjusted R2 14. Number of Observations

I D(Rest of the World)

II D(DIs)

III D(Insurance)

29208.85** 3.23 0.24** 2.16 0.28 0.49 4.40** 2.82 1.90* 1.78 0.19** 3.85

2239.01 0.77 0.20 1.60 0.35 0.96 0.23 0.44 0.08 0.21 0.07** 2.59

1135.82 0.69 0.55** 3.48 0.25 1.45 0.19 0.86 0.01 0.03 0.01 1.16

1005.97 0.45 0.18** 2.08 0.12 0.32 0.75 1.16 0.02 0.08 0.06** 3.94

2792.85 1.39 0.11 0.92 0.23 1.12 1.07** 2.03 0.05 0.26 0.00 0.08

5422.06** 1.97 0.59** 6.67 0.12** 4.68 0.00 0.23 0.02** 3.46 0.42 89

19616.04 0.64 0.07 0.35 0.74** 3.33 0.06 0.65 0.14 1.13 0.24 89

1817.78 0.36 0.48** 3.27 0.04 0.95 0.01 0.65 0.04** 2.68 0.46 89

17103.04 0.38 0.08 1.03 0.44 1.02 0.08 0.74 0.40** 3.66 0.66 89

690.43 0.06 0.15 1.06 0.12 1.46 0.06* 1.75 0.05 1.33 0.13 89

IV D(Investment)

V D(Pension and Retirement)

VI D(State and Local Gov’t) 1058.06 0.54 0.35* 1.74 0.09 0.36 0.21 0.66 0.22 1.20 0.01 1.02 3898.78 0.67 0.11 0.70 0.05 1.14 0.02 1.05 0.01 0.71 0.01 89

VII D(Brokers and Dealers 6887.37 1.12 0.46** 4.83 0.67 0.72 0.37 0.28 0.21 0.26 0.16** 2.07 37605.62 1.10 0.23* 1.81 0.27 1.36 0.10 1.39 0.19* 1.73 0.20 89

VIII D(HH)

23815.45** 2.15 0.16 1.16 0.84 0.59 4.80** 2.17 0.79 0.57 0.41** 4.99 38198.13 0.52 0.03 0.29 0.42 0.75 0.75** 5.02 0.13 0.63 0.26 89

t-Statistics (based on Newey–West heteroskedasticity consistent standard errors) are below the coefficient estimates. Share is defined as the sum of Coupons and TIPS as a fraction of total outstanding Treasury issuance. DNegative is a dummy variable that is one when D(Treasury_Fed_Bill) < 0. Note that an interactive DNegative dummy for the post2007 cannot be added because all changes in D(Treasury_Fed_Bill) are negative. * Indicates significance at 90% level of significance. ** Indicates significance at 95% level of significance.

overall Treasury portfolio maturity, while the ROW in the pre-crisis era goes after relative yield, adjusting away from it. Finally, Tables 4a and 4b repeat the analysis in Tables 3a and 3b, allowing for the adjustment of the entire portfolio of Treasury securities, and add the interactive dummy variable which equals 1 when the Federal Reserve reduced its bill holdings (row 4). These results are similar to those reported above, and seem to suggest that households and insurance companies responded the most significantly to the runoff in the Federal Reserve’s bill holdings. Note that an interactive dummy for the post-2007 cannot be added because all changes in D(Treasury_Fed_Bill) are negative. Similar analysis is conducted for the Federal Reserve’s purchases of MBS. As shown in Table 5(a) and (b), households (again, including hedge funds), investment companies, and pension and retirement funds are the ultimate sellers of these securities to the Federal Reserve (row 3). Based on the estimates from these regressions, of the $1.25 trillion MBS purchases during LSAP1, we estimate that the Federal Reserve ultimately purchased nearly half of these securities from households and a bit over $200 billion from investment companies. 3.2. Panel specification The results reported above are suggestive, however, they do rely on sample periods that include a substantial amount of time that is a different regime from the asset programs. With quarterly data, restricting the sample to only the most recent years would severely restrict the degrees of freedom in the estimation. To address the concern that the results may not be fully indicative of the relevant period and yet have enough observations to allow for statistical inference, we estimate panel regressions with fixed effects where we pool the different investor types together but interact a dummy variable for each investor type with the change in the Federal

Reserve’s holdings of the securities. Doing so conserves degrees of freedom but comes at the expense of imposing that some of the coefficients are constant across investor types. We estimate this model for both Treasury securities and for MBS, and we estimate the model over the sample period 2001:Q1 to 2012:Q3 and from 2007:Q1 to 2012:Q3. The longer period gives us more degrees of freedom for the estimation, whereas the shorter period focuses more directly on the Federal Reserve’s programs. As will be shown, the results are fairly similar to the baseline specification. As in the previous specification, the dependent variable is the change in holdings for the entity type. The independent variables are lagged changes in holdings, and changes in Fed holdings, allowing for a different coefficient for each entity type. Since we only include the largest investor types in this analysis, we do not restrict the coefficients on the Fed’s holdings to sum to one.7 For each holdings type, we estimated an Arellano–Bover/Blundell–Bond linear dynamic panel data estimator to account for the lagged dependent variable in our specifications. All specifications have cluster-robust standard errors. The single lag included in all of the specifications seems to be appropriate, according to results from an Arellano-Bond autocorrelation test. As shown in Table 6, our panel specification suggests that a number of different entity types changed their holdings of Treasury securities and MBS in response to Fed purchases. The results are broadly similar across the two sample periods. For Treasury holdings, the results suggest that broker-dealers, households, and investment companies all experienced the opposite direction of a change in holdings in response to Fed changes in holdings – that is, if Fed holdings went down, then that entity type’s holdings went 7 In an alternative regression where we include a residual investor type, a Wald test rejects the restriction that the change in Fed’s holdings coefficients sum to one. The collinearity of some of the shares with the lagged term may affect this result.

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Table 4b Holdings of treasury securities (1991.Q1–2012.Q3). I D(Rest of the World) Pre-2007 1. Constant 2. Lagged Dependent Variable 3. D(Treasury_Fed_Bill)t 4. D(Treasury_Fed_Bill)t  DNegative 5. D(Treasury_Fed_Coupon+TIPS)t 6. D(Treasury_Outstanding)t 7. Sharet-1 Post 2007 8. Constant 9. Lagged dependent variable 10. D(Treasury_Fed_Bill)t 11. D(Treasury_Fed_Coupon+TIPS)t 12. D(Treasury_Outstanding)t 13. Sharet1 14. Adjusted R2 15. Number of observations

II D(DIs)

III D(Insurance)

108.52 0.01 0.17* 1.67 0.62* 1.66 4.99** 3.47 3.14** 3.22 0.16** 3.86 5074.58** 3.47

4213.40 0.67 0.17 1.30 0.26 0.57 0.12 0.19 0.19 0.51 0.08** 2.82 1076.66 1.35

1356.09 0.48 0.55** 3.39 0.24 1.42 0.19 0.83 0.00 0.02 0.01 1.12 36.37 0.11

13663.95 0.13 0.08 0.95 0.44 0.84 0.08 0.66 0.41** 3.32 237.92 0.05 0.67 89

25472.54 1.02 0.22 1.41 0.18** 3.05 0.06* 1.67 0.04 1.20 1629.24 0.77 0.14 89

4816.60 0.69 0.59** 4.86 0.12** 3.25 0.00 0.23 0.02** 2.85 43.06 0.13 0.40 89

IV D(Investment)

V D(Pension and Retirement)

VI D(State and Local Gov’t)

VII D(Brokers and Dealers

VIII D(HH)

105.14 0.03 0.18** 2.03 0.13 0.35 0.77 1.14 0.03 0.08 0.06** 4.07 183.60 0.33

2989.17 0.95 0.11 0.90 0.23 1.03 1.07** 1.96 0.05 0.22 0.00 0.06 32.41 0.06

9480.02** 1.99 0.25 1.32 0.15 0.68 0.12 0.45 0.05 0.32 0.01 0.47 1318.57** 2.52

881.57 0.09 0.46** 4.88 0.58 0.64 0.27 0.21 0.55 0.64 0.16** 2.05 1293.29 0.89

7495.96 0.51 0.11 0.88 0.41 0.36 5.16** 2.55 1.93 1.33 0.45** 5.48 5059.38** 2.72

128627.30** 2.51 0.01 0.10 1.00** 4.32 0.02 0.21 0.20* 1.71 7634.70** 2.94 0.33 89

6408.50 0.62 0.45** 3.29 0.02 0.40 0.01 0.51 0.03** 2.18 536.53 0.90 0.45 89

15138.26 1.16 0.22* 1.71 0.01 -0.21 0.01 0.72 0.00 0.11 1347.86* 1.80 0.08 89

94647.28* 1.82 0.25** 2.26 0.39* 1.84 0.08 1.02 0.22** 2.02 3933.21 1.53 0.20 89

198628.00 1.06 0.14 0.95 0.91 0.99 0.87** 3.59 0.03 0.11 10239.06 1.10 0.29 89

t-Statistics (based on Newey–West heteroskedasticity consistent standard errors) are below the coefficient estimates. Share is defined as the sum of Coupons and TIPS as a fraction of total outstanding Treasury issuance. DNegative is a dummy variable that is one when D(Treasury_Fed_Bill) < 0. Note that an interactive DNegative dummy for the post2007 cannot be added because all changes in D(Treasury_Fed_Bill) are negative. * Indicates significance at 90% level of significance. ** Indicates significance at 95% level of significance.

up, and vice versa. For MBS holdings, we also find instances of significant responses, and somewhat more frequently than for Treasury holdings. Broker-dealers, GSEs, households, investment companies, pension funds, and the rest of world, experienced opposing direction flows. These results bolster those reported above, as we generally find the same groups significantly changed holdings in response to Federal Reserve actions. 4. Portfolio rebalancing Understanding what entity types sell securities to the Federal Reserve is instructive in discriminating across competing hypotheses for how the asset purchases work, especially in understanding the direct effect on Treasury securities. Krishnamurthy and Vissing-Jorgensen (2011) also ask how declines in Treasury yields spill over to yields on other assets. In principle, when the Federal Reserve buys safe, longer-term assets, it could induce investors to shift their portfolios toward other, potentially riskier assets, pushing down those yields. To examine that portfolio rebalancing effect, we investigate whether investor-types’ portfolios changed in response to Federal Reserve actions. The setup is as follows. We estimate a seemingly unrelated system of equations (SUR) for each investor type that appears to react significantly to Federal Reserve actions based on the previous regression results. We allow holdings of Treasury securities, MBS, corporate equity, corporate bonds, commercial paper, municipal securities and loans, and checkable deposits and currency to characterize the portfolios.8 We estimate the holdings of each of

these assets as a separate equation in a system of seemingly unrelated regressions, regressing the asset holdings on Federal Reserve actions as we have done above, but also on other market measures that could affect portfolio holdings, such as the slope of the yield curve, risk spreads, and equity market volatility, all measured in basis points. Table 7 shows the results from the SUR estimation. The results are only reported for those investor types that exhibit significant portfolio rebalancing behavior. The results are broadly consistent with those in the previous section. On the issue of whether there is evidence of portfolio rebalancing in the wake of Federal Reserve asset purchases, we examine whether an investor type increases their holdings of other assets when that investor’s holdings of Treasury securities (row 3) or MBS (row 4) declines in response to Federal Reserve asset purchases. We investigate this possibility for those entity types that showed significant decline in their holdings of Treasury securities or MBS in some of our earlier specifications. We are interested in finding out whether these investors increase their holdings of riskier assets. The only investor type for which there is a decline in the holdings of both Treasury and MBS in response to Federal Reserve asset purchases is the household category. Recall, from the analysis above, households are the largest seller to the Federal Reserve for both Treasury securities and MBS. Now we find that purchases of Treasury securities by the Federal Reserve induce households to shift these asset holdings 8 We also include holdings of federal funds and repo for pension funds as provided in the Flow of Funds data.

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S. Carpenter et al. / Journal of Banking & Finance 52 (2015) 230–244 Table 5a Holdings of MBS (1991.Q1–2012.Q3).

Pre-2007 1. Constant 2. Lagged Dependent Variable 3. D(MBS_Fed)t 4. D(MBS_Outstanding)t Post 2007 5. Constant 6. Lagged Dependent Variable 3. D(MBS_Fed)t 4. D(MBS_Outstanding)t 9. Memo: b3/1  b2 10. Adjusted R2 11. Number of observations

I D(Rest of the World)

II D(DIs)

22048.28** 2.30 0.30 1.50 66.36** 2.16 0.02 0.26

12396.08 1.21 0.10 0.82 5.65 0.27 0.00 0.00

7918.29 1.15 0.55** 4.29 0.04 0.65 0.00 0.06 0.10 0.41 89

31729.55** 3.01 0.12 0.52 0.00 0.07 0.08 1.36 0.00 0.02 89

D(MBS_Fed) Implications of coefficient estimates (in $billions) LSAP1 $1250

III D(Insurance)

IV D(Investment)

V D(Pension and Retirement)

VI D(State and Local Gov’t)

4615.84** 3.42 0.50** 4.17 11.35** 2.25 0.01 0.74

11882.72** 2.60 0.24** 2.38 23.25 1.57 0.20** 5.00

3800.35 1.08 0.28** 2.00 3.51 0.39 0.01 0.38

1899.54 0.86 0.20 1.22 15.90* 1.84 0.04** 1.98

1056.48 1.08 0.41** 2.09 0.01 1.33 0.00 0.44 0.01 0.32 89

30884.56** 2.23 0.34** 3.17 0.24** 2.64 0.08 1.32 0.37 0.42 89

1166.66 0.91 0.36** 3.79 0.05** 3.54 0.02** 2.22 0.07 0.31 89

2597.58 1.02 0.39** 3.40 0.00 0.46 0.01 0.43 0.01 0.23 89

VII D(Brokers and Dealers

VIII D(HH)

5214.78* 1.91 0.15 1.20 7.58 0.87 0.04 0.97

6638.55 0.56 0.04 0.29 31.15 0.97 0.13 0.93

3404.40 0.44 0.04 0.16 0.09 1.27 0.07 0.81 0.08 0.04 89

11969.10 0.72 0.14 0.97 0.48** 2.43 0.13 1.04 0.42 0.17 89

D(Investment) b3  D(MBS_Fed)

D(Pension and Retirement) b3  D(MBS_Fed)

D(HH) b3  D(MBS_Fed)

$300

$62.5

$600

t-Statistics (based on Newey–West heteroskedasticity consistent standard errors) are below the coefficient estimates. * Indicates significance at 90% level of significance. ** Indicates significance at 95% level of significance.

Table 6 Panel estimation of Treasury and MBS holdings (Post-2001). Variable

1. Constant 2. Lag(Fed holdings) 3. Broker-dealers 4. Depository institutions 5. GSEs 6. Households 7. Insurance companies 8. Investment funds 9. Pension funds 10. Rest of world 11. State and local governments 12. Number of observations

2001–2012

2007–2012

Treasury

MBS

Treasury

MBS

15.78** (6.67) 0.17 (0.15) 0.07** (0.03) 0.01 (0.03) 0.02 (0.02) 0.42** (0.01) 0.01 (0.01) 0.12** (0.04) 0.01 (0.02) 0.08* (0.05) 0.01 (0.02) 405

6.60** (2.46) 0.14* (0.08) 0.07** (0.03) 0.05 (0.08) 0.18** (0.06) 0.38** (0.06) 0.01 (0.01) 0.20** (0.02) 0.08** (0.01) 0.25** (0.05) 0.02** (0.01) 405

32.65** (12.67) 0.08 (0.13) 0.07** (0.03) 0.03 (0.05) 0.05 (0.04) 0.53** (0.01) 0.02 (0.02) 0.14** (0.03) 0.07 (0.07) 0.08 (0.08) 0.06 (0.06) 189

5.22 (5.08) 0.11 (0.09) 0.08** (0.04) 0.08 (0.07) 0.18** (0.06) 0.38** (0.06) 0.01 (0.02) 0.24** (0.02) 0.07** (0.02) 0.19** (0.06) 0.00 (0.02) 189

Standard errors (based on clustered robust standard errors around each investor type) are below the coefficient estimates. * Indicates significance at 90%/95% level of significance. ** Indicates significance at 90%/95% level of significance.

toward corporate bonds, commercial paper, municipal debt and loans, and bank deposits; MBS purchases drive all of the same substitutions, except for bank deposits. In addition, when pension funds sell MBS to the Federal Reserve, they then shift their portfolio toward repurchase agreements, or very short-term assets.

While the maturity of the repurchase agreements may be shorter than MBS, the underlying collateral could be riskier, thereby making them an overall riskier asset. This evidence of shifting investors out of safe assets into riskier assets points to a credible channel for the effects of asset purchases on broader financial markets. These results are further bolstered by performing the same bills versus coupons analysis above. In particular, as shown in Table 8, pension funds and households show some signs of portfolio rebalancing in light of Federal Reserve purchases. 5. Conclusions and further research In this paper, we tried to uncover the investor classes that are the ultimate source of the securities from which the Federal Reserve buys and how these investors then rebalance their portfolios. Understanding these questions points to parts of the mechanism through which the Federal Reserve’s asset programs affect financial markets. We find that not all investor types sell to the Fed uniformly. Households (the group that includes hedge funds), broker-dealers, and insurance companies appear to be the largest sellers of Treasury securities when the Federal Reserve buys these securities. Households, investment companies, and to a lesser extent, pension funds, are the largest sellers of MBS when the Federal Reserve buys. When selling to the Fed, the households seem to rebalance their portfolios toward corporate bonds, commercial paper, and municipal debt and loans, while pension funds shift their portfolio toward repurchase agreements, or very short-term assets. These results suggest that there is some segmentation in the markets for these securities and so a preferred-habitat motivation may be plausible. In addition, we find evidence that Federal Reserve purchases do not simply affect the yields on the assets purchased, but also induce investors to buy other assets, putting downward pressure on other market rates, as well. We do not

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Table 7 Portfolio Rebalancing Model (2001.Q1–2012.Q3). HH

Treasury

MBS

Corporate Equity

Corporate Bond

Open Market Paper or CP

Municipal Securities and Loans

Checkable Deposits and Currency

1. Constant

42444.78** 2.44 0.04

36445.80* 1.91 0.06

53989.04 1.47 0.02

112952.40** 3.52 0.22**

1345.47 0.89 0.66**

34892.48** 8.98 0.00

2746.17 0.21 0.05

0.55 0.81** 6.69 0.30** 2.32 0.22**

0.54 0.07 0.56 0.22* 1.72 0.14**

0.86 0.37 1.52 0.09 0.36 0.40**

2.42 0.64** 4.18 0.36** 2.35 0.73**

7.36 0.03** 2.77 0.06** 5.29 0.06**

0.05 0.13** 4.98 0.05** 2.03 0.98**

0.54 0.22** 2.50 0.01 0.14 0.20**

4.33 11788.82 1.54 249.11** 3.05 9253.79** 5.96 445.19** 2.83 47

2.09 9258.47 1.22 276.86** 3.40 6491.82** 4.16 927.33** 5.74 47

7.69 3849.97 0.25 180.61 1.12 3375.08 0.97 428.97 0.48 47

9.44 6782.99 0.63 283.31** 2.63 7914.77** 3.99 747.15** 3.54 47

5.68 79.19 0.12 6.72 0.95 173.84 1.26 14.91 1.11 47

69.80 4530.30** 2.70 16.83 1.00 403.44 1.18 83.89** 2.42 47

3.11 3,514.83 0.63 60.64 1.06 3,979.01** 3.50 279.03** 2.42 47

0.66

0.47

0.97

0.59

0.72

0.98

0.30

2. Lagged Dependent variable 3. D(Treasury_Fed)t 4. D(MBS_Fed)t 5. D(Outstanding issuance)t 6. (Tb10yrTb3m)t 7. D(HY OAS)t 8. D(VIX)t 9. D(MSCI)t 10. Number of observations 11. Adjusted R2 Pension Funds

1. Constant 2. Lagged Dependent variable 3. D(Treasury_Fed)t 4. D(MBS_Fed)t 5. D(Outstanding issuance)t 6. (Tb10yrTb3m)t 7. D(HY OAS)t 8. D(VIX)t 9. D(MSCI)t 10. Number of observations 11. Adjusted R2

Treasury

MBS

Corporate Equity

Corporate Bond

Open Market Paper or CP

Municipal Securities and Loans

Checkable Deposits and Currency

Fed Funds and Security Repos

5372.08** 2.02 0.31**

2860.86 0.78 0.47**

15005.76 1.19 0.01

7174.08 1.39 0.39**

431.78 0.35 0.00

138.62 0.33 0.22**

5.01 0.01 0.23**

901.76 0.90 0.11

3.10 0.02 1.00 0.06** 2.84 0.03**

4.17 0.01 0.25 0.04* 1.89 0.01

0.69 0.20** 2.37 0.29** 3.44 0.12**

3.56 0.01 0.31 0.03 1.10 0.00

0.04 0.01 1.08 0.01 0.87 0.04**

2.10 0.00 0.75 0.00 0.05 0.00

2.18 0.00 0.31 0.01 1.54 0.00

0.98 0.01 1.54 0.02** 2.75 0.00

3.45 2146.58* 1.84 15.08 1.19 324.97 1.41 0.24 0.01 47

1.03 546.75 0.38 5.99 0.41 138.32 0.48 30.94 1.03 47

6.85 9713.21* 1.85 189.27** 3.46 80.44 0.07 790.15** 2.69 47

0.32 1850.95 1.06 13.47 0.75 241.27 0.75 27.60 0.82 47

5.71 509.64 0.93 0.58 0.11 198.92* 1.84 22.49** 2.08 47

0.26 128.10 0.72 1.27 0.70 34.11 0.92 8.08** 2.15 47

0.38 213.98 1.01 3.56* 1.63 69.21 1.60 11.37** 2.56 47

0.20 746.12* 1.73 15.40** 3.65 182.36** 0.00 7.21 0.79 47

0.60

0.38

0.98

0.26

0.30

0.11

0.01

0.14

Treasury

MBS

Corporate Equity

Corporate Bond

Open Market Paper or CP

Municipal Securities and Loans

Checkable Deposits and Currency

Fed Funds and Security Repos

583.88 0.05 0.29**

8425.02 0.84 0.18

3693.14 1.36 0.14*

3113.93 0.35 0.12

2509.77 0.66 0.18*

1172.78 0.73 0.45**

1712.23 0.63 0.40**

29055.00 1.25 0.22*

3.23 0.03 0.38 0.11 1.20 0.19**

1.21 0.08 1.23 0.14** 2.05 0.03

1.83 0.01 0.28 0.03* 1.75 0.01**

1.13 0.04 0.82 0.01 0.11 0.04*

1.83 0.03 1.36 0.10** 3.84 0.06**

4.63 0.01 1.25 0.02* 1.76 0.00

3.82 0.03* 1.70 0.06** 3.14 0.03**

1.84 0.08 0.53 0.08 0.54 0.20

5.37 11027.77** 2.11

0.76 1371.84 0.35

2.88 1740.89 1.54

1.74 1018.84 0.33

3.29 424.35 0.26

0.32 7.88 0.01

2.56 883.18 0.75

1.30 15371.24 1.55

Brokers and Dealers

1. Constant 2. Lagged Dependent variable 3. D(Treasury_Fed)t 4. D(MBS_Fed)t 5. D(Outstanding issuance)t 6. (Tb10yr-Tb3m)t

241

S. Carpenter et al. / Journal of Banking & Finance 52 (2015) 230–244 7. D(HY OAS)t 8. D(VIX)t 9. D(MSCI)t 10. Number of observations 11. Adjusted R2

52.06 0.94 3774.91** 3.64 310.95** 2.92 47

43.73 1.07 1285.43 1.57 26.95 0.32 47

29.50** 2.44 250.23 1.00 86.82 1.32 47

35.77 1.13 674.28 1.11 108.38* 1.80 47

50.97** 2.99 1140.85** 3.43 53.65 1.59 47

11.58* 1.66 310.71** 2.20 15.98 1.11 47

1.77 0.14 741.36** 2.99 54.68** 2.23 47

92.14 0.93 3856.35* 0.04 92.22 0.43 47

0.45

0.02

0.71

0.34

0.36

0.23

0.33

0.24

Treasury

MBS

Corporate Equity

Corporate Bond

Open Market Paper or CP

Municipal Securities and Loans

Checkable Deposits and Currency

Fed Funds and Security Repos

2482.44* 1.69 0.46**

590.62 0.32 0.58**

6263.71 1.19 0.02

3894.47 0.57 0.29**

1063.86 0.61 0.14

2073.65* 1.92 0.71**

3884.56* 1.71 0.00

785.97 0.97 0.32**

4.12 0.02* 1.68 0.00 0.02 0.01

6.40 0.00 0.30 0.01 0.95 0.00

0.87 0.01 0.31 0.01 0.40 0.05**

2.59 0.00 0.07 0.03 0.81 0.03**

1.13 0.00 0.06 0.02 1.34 0.00

8.44 0.02** 2.36 0.01 0.82 0.00

0.03 0.02 1.25 0.04** 2.78 0.01

2.75 0.00 0.00 0.01 1.52 0.01

1.45 1589.50** 2.40 4.89 0.68 164.35 1.30 25.37* 1.90 47

0.53 298.41 0.40 19.29** 2.49 39.87 0.26 33.45** 2.11 47

6.61 239.15 0.11 1.79 0.08 669.03 1.31 85.38 0.66 47

2.04 7254.80** 2.95 50.06** 2.14 502.65 1.15 18.59 0.42 47

0.21 1140.71 1.49 7.65 1.03 145.97 0.97 4.50 0.30 47

0.64 70.37 0.17 4.00 0.94 64.21 0.75 2.10 0.23 47

0.63 526.83 0.53 31.82** 3.11 217.62 1.09 45.10** 2.21 47

1.36 264.89 0.77 0.47 0.14 115.97* 0.03 16.67** 2.22 47

0.51

0.45

0.97

0.38

0.01

0.64

0.12

0.17

Treasury

MBS

Corporate Equity

Corporate Bond

Open Market Paper or CP

Municipal Securities and Loans

Checkable Deposits and Currency

Fed Funds and Security Repos

2967.22 0.31 0.03

19747.87** 1.95 0.31**

33027.40* 1.92 0.02

48138.81** 3.40 0.18

21554.91** 2.08 0.18**

22436.94** 6.24 0.01

-1614.93 0.76 0.40**

16754.14 1.59 0.10

0.23 0.10 1.50 0.12* 1.72 0.08**

3.79 0.02 0.25 0.09 1.28 0.03

1.26 0.16 1.36 0.10 0.84 0.32**

1.27 0.01 0.25 0.04 0.65 0.02

1.96 0.12* 1.87 0.10 1.37 0.31**

0.07 0.08** 3.44 0.02 0.82 0.02**

3.14 0.00 0.08 0.01 0.43 0.02*

0.81 0.01 0.16 0.01 0.07 0.17**

2.62 1829.94 0.43 120.68** 2.63 1059.93 1.13 25.67 0.28 47

0.69 2211.83 0.55 133.29** 3.22 2775.12** 3.21 259.73** 2.97 47

13.64 11362.36 1.58 113.76 1.51 1583.40 0.95 1537.37** 3.84 47

0.76 8404.79** 2.11 88.41** 2.11 340.84 0.39 40.21 0.50 47

5.35 13026.96** 2.82 60.30 1.36 3066.03** 3.39 21.92 0.25 47

1.98 5313.87** 3.98 14.33 1.02 491.77* 1.80 30.27 1.10 47

1.91 514.80 0.55 8.64 0.88 172.07 0.90 28.91 1.50 47

1.96 3172.72 0.73 57.97 1.35 918.32 0.02 169.33* 1.77 47

0.39

0.65

0.98

0.33

0.49

0.45

0.07

0.13

Treasury

MBS

Corporate Equity

Corporate Bond

Open Market Paper or CP

Municipal Securities and Loans

Checkable Deposits and Currency

Fed Funds and Security Repos

7033.26 1.28 0.09

4839.01 0.37 0.13

491.44 0.59 0.05

33681.63** 1.94 0.10

1792.32 0.38 0.13

3896.32** 2.04 0.39**

1505.72 0.16 0.03

2689.17 0.21 0.23**

0.75

1.04

0.92

0.68

1.06

2.52

0.30

2.62

Insurance companies

1. Constant 2. Lagged Dependent variable 3. D(Treasury_Fed)t 4. D(MBS_Fed)t 5. D(Outstanding issuance)t 6. (Tb10yr-Tb3m)t 7. D(HY OAS)t 8. D(VIX)t 9. D(MSCI)t 10. Number of observations 11. Adjusted R2 Investment funds

1. Constant 2. Lagged Dependent variable 3. D(Treasury_Fed)t 4. D(MBS_Fed)t 5. D(Outstanding issuance)t 6. (Tb10yr-Tb3m)t 7. D(HY OAS)t 8. D(VIX)t 9. D(MSCI)t 10. Number of observations 11. Adjusted R2 DI

1. Constant 2. Lagged Dependent variable

(continued on next page)

242 3. D(Treasury_Fed)t 4. D(MBS_Fed)t 5. D(Outstanding issuance)t 6. (Tb10yr-Tb3m)t 7. D(HY OAS)t 8. D(VIX)t 9. D(MSCI)t 10. Number of observations 11. Adjusted R2

S. Carpenter et al. / Journal of Banking & Finance 52 (2015) 230–244 0.05 1.22 0.08** 1.97 0.05**

0.02 0.18 0.07 0.79 0.04

0.00 0.11 0.00 0.64 0.004**

0.13 1.48 0.11 1.33 0.04

0.04 1.20 0.07** 2.27 0.07**

0.00 0.41 0.02 1.60 0.01

0.19** 2.93 0.00 0.04 0.39**

0.04 0.46 0.21** 2.39 0.13

2.82 434.86 0.18 14.50 0.55 779.01 1.62 120.63** 2.42 47

0.90 14518.51** 2.73 25.67 0.49 2508.31** 2.37 177.93 1.62 47

3.70 240.98 0.69 2.90 0.80 111.42 1.37 8.99 0.43 47

0.80 10994.51* 1.91 14.10 0.24 117.44 0.11 31.73 0.29 47

2.78 1320.95 0.64 26.27 1.15 1451.00** 3.33 94.95** 2.30 47

0.85 27.68 0.04 6.49 0.88 348.16** 2.40 22.91 1.55 47

7.80 1085.11 0.25 20.37 0.45 358.20 0.42 29.27 0.33 47

1.36 2100.40 0.39 250.79** 4.69 1688.59 0.04 132.46 1.09 47

0.24

0.15

0.90

0.14

0.28

0.16

0.45

0.52

Treasury

MBS

Corporate Equity

Corporate Bond

Open Market Paper or CP

Municipal Securities and Loans

Checkable Deposits and Currency

Fed Funds and Security Repos

27545.98** 2.10 0.11

45524.19** 3.61 0.21

21251.31 1.36 0.03

12780.84 0.50 0.23**

836.86 0.23 0.18

492.26* 1.86 0.79**

1665.62 0.77 0.18**

14494.45 1.50 0.10

1.40 0.07 0.75 0.26** 2.67 0.43**

1.51 0.11 1.43 0.26** 2.98 0.02

0.69 0.02 0.21 0.07 0.68 0.09**

2.38 0.18 1.53 0.08 0.62 0.20**

1.44 0.03 1.43 0.06** 2.48 0.07**

8.64 0.00 0.61 0.003** 1.93 0.00

2.01 0.05** 3.16 0.00 0.23 0.02*

1.20 0.11* 1.74 0.08 1.15 0.65**

8.77 3910.92 0.69 112.83* 1.83 5554.40** 4.91 230.63** 1.94 47

0.50 12678.94** 2.71 151.70** 3.21 1304.95 1.39 6.59 0.07 47

4.16 1739.55 0.27 15.01 0.22 371.65 0.25 376.19 0.99 47

3.41 5553.86 0.67 224.45** 2.74 4101.23** 2.63 172.74 1.07 47

2.95 1769.21 1.15 37.58** 2.44 553.67* 1.83 5.49 0.18 47

0.45 79.97 0.73 0.36 0.33 29.28 1.31 2.68 1.11 47

1.70 887.60 0.97 55.49** 5.86 552.28** 2.97 27.41 1.43 47

8.29 2133.74 0.52 59.09 1.45 1021.88 0.20 164.13* 1.81 47

0.76

0.50

0.93

0.55

0.14

0.60

0.56

0.56

Treasury

MBS

Corporate Equity

Corporate Bond

Open Market Paper or CP

Municipal Securities and Loans

Checkable Deposits and Currency

Fed Funds and Security Repos

6755.28** 4.57 0.20*

5954.70** 3.12 0.40**

629.68 0.52 0.37**

1241.5**9 2.64 0.35**

1572.25 1.18 0.91*

92.69** 2.65 0.53**

288.56 0.24 0.39**

575.13 1.17 0.19**

1.90 0.00 0.19 0.04** 2.85 0.01**

4.71 0.03* 1.91 0.02 1.44 0.00

4.83 0.00 0.24 0.00 0.39 0.00

5.39 0.00 1.15 0.00 0.29 0.002**

8.81 0.00 0.21 0.02 1.59 0.02*

9.32 0.00 0.50 0.00 0.67 0.00

3.93 0.02** 2.11 0.01 1.38 0.02**

2.71 0.01 1.52 0.00 0.50 0.00

2.47 477.17 0.66 17.29** 2.19 8.26 0.06 10.04 0.77 47

0.50 1380.11* 1.68 6.80 0.75 226.05 1.30 3.52 0.22 47

0.97 554.25 1.02 17.12** 2.77 19.41 0.17 -9.69 0.43 47

2.90 260.91 1.32 1.72 0.79 70.32* -1.69 2.23 0.58 47

1.74 575.58 0.93 0.94 0.14 72.86 0.58 13.01 1.14 47

0.41 15.51 0.98 0.11 0.65 2.36 0.70 0.23 0.73 47

2.82 40.17 0.07 0.49 0.08 363.88** 3.16 19.67* 1.80 47

-0.22 93.87 0.42 1.90 0.78 32.96 0.00 13.26** 2.86 47

0.24

0.41

0.43

0.39

0.68

0.38

0.41

0.27

ROW

1. Constant 2. Lagged Dependent variable 3. D(Treasury_Fed)t 4. D(MBS_Fed)t 5. D(Outstanding issuance)t 6. (Tb10yrTb3m)t 7. D(HY OAS)t 8. D(VIX)t 9. D(MSCI)t 10. Number of observations 11. Adjusted R2 SL

1. Constant 2. Lagged Dependent variable 3. D(Treasury_Fed)t 4. D(MBS_Fed)t 5. D(Outstanding issuance)t 6. (Tb10yr-Tb3m)t 7. D(HY OAS)t 8. D(VIX)t 9. D(MSCI)t 10. Number of observations 11. Adjusted R2

t-Statistics (based on SUR estimation) are below the coefficient estimates. * Indicates significance at 90% level of significance. ** Indicates significance at 95% level of significance.

243

S. Carpenter et al. / Journal of Banking & Finance 52 (2015) 230–244 Table 8 Portfolio Rebalancing Model (2001.Q1–2012.Q3), with Bills and Coupons. HH

1. Constant 2. Lagged Dependent variable 3. D(Treasury_Fed_Bill)t 4. D(Treasury_Fed_Coupon+TIPS)t 5. D(MBS_Fed)t 6. D(Outstanding issuance)t 7. (Tb10yr-Tb3m)t 8. D(HY OAS)t 9. D(VIX)t 10. D(MSCI)t 10. Number of observations 11. Adjusted R2

Treasury

MBS

Corporate Equity

Corporate Bond

Open Market Paper or CP

Municipal Securities and Loans

Checkable Deposits and Currency

8502.13 0.30 0.08 0.73 0.73 1.54 0.04 1.10 0.39** 2.12 0.21** 2.47 2932.22 0.29 177.65 1.62 8710.36** 4.14 369.94* 1.73 47 0.37

908.47 0.04 0.13 1.18 0.12 0.34 0.05** 2.20 0.30** 2.32 0.09 1.17 8962.94 1.31 302.81** 3.92 6771.45** 4.55 982.16** 6.30 47 0.51

88602.45* 1.90 0.01 0.53 0.36 0.49 0.04 0.91 0.06 0.23 0.41** 7.67 10429.09 0.72 139.28 0.86 3460.28 0.99 256.34 0.27 47 0.97

151175.40** 3.22 0.16* 1.66 0.43 0.84 0.04 1.14 0.29* 1.65 0.73** 7.94 20226.56* 1.77 251.27** 2.07 6905.33** 3.10 630.63** 2.70 47 0.46

2038.23 1.21 0.71** 9.17 0.11** 4.04 0.00 1.11 0.05** 5.43 0.05** 6.06 215.17 0.37 7.05 1.10 215.46* 1.70 19.92 1.57 47 0.75

38469.68** 7.15 0.00 0.09 0.27** 2.99 0.01 0.99 0.04 1.26 0.97** 56.37 6,765.69** 3.78 8.73 0.46 312.37 0.81 77.61** 1.95 47 0.98

25,543.95 1.59 0.01 0.09 0.10 0.36 0.04** 2.53 0.01 0.16 0.18** 2.90 240.86 0.04 32.28 0.56 4016.49** 3.48 310.49 2.59 47 0.27

Treasury

MBS

Corporate Equity

Corporate Bond

Open Market Paper or CP

Municipal Securities and Loans

Checkable Deposits and Currency

Fed Funds and Security Repos

1955.06 0.61 0.26** 2.50 0.04 0.80 0.01 1.44 0.07** 3.12 0.02** 2.58 1563.47 1.40 13.55 1.08 335.27 1.46 5.19 0.21 47 0.60

10947.39** 2.31 0.40** 3.85 0.02 0.33 0.01** 2.16 0.06** 2.62 0.00 0.14 776.15 0.59 7.67 0.56 172.30 0.62 33.84 1.16 47 0.41

19012.50 1.34 0.01 0.53 0.57** 2.52 0.04** 2.82 0.29** 3.81 0.10** 6.32 5976.15 1.32 175.85** 3.53 355.77 0.33 1154.79** 4.30 47 0.98

6905.82 1.04 0.34** 3.05 0.11 1.48 0.00 0.08 0.03 1.27 0.00 0.23 1909.34 1.15 15.46 0.88 290.75 0.90 37.96 1.11 47 0.26

656.06 0.44 0.00 0.05 0.00 0.07 0.00 1.11 0.01 0.80 0.04** 5.44 399.73 0.77 0.61 0.11 194.80* 1.80 22.95** 2.07 47 0.28

435.49 0.87 0.11 1.01 0.00 0.24 0.00 1.20 0.00 0.23 0.00 0.86 44.25 0.27 1.25 0.71 19.88 0.55 5.93 1.56 47 0.07

-5.75 0.01 0.24** 2.39 0.00 0.03 0.00 0.05 0.01 1.61 0.00 0.59 200.56 1.00 3.79* 1.74 67.39 1.55 11.26** 2.49 47 0.05

242.37 0.20 0.11 0.99 0.01 0.57 0.00 0.75 0.02** 2.58 0.00 0.21 577.29 1.40 14.48** 3.38 174.41** 1.99 7.37 0.77 47 0.08

Pension Funds

1. Constant 2. Lagged Dependent variable 3. D(Treasury_Fed_Bill)t 4. D(Treasury_Fed_Coupon+TIPS)t 5. D(MBS_Fed)t 6. D(Outstanding issuance)t 7. (Tb10yr-Tb3m)t 8. D(HY OAS)t 9. D(VIX)t 10. D(MSCI)t 10. Number of observations 11. Adjusted R2 HH

1. Constant 2. Lagged Dependent variable 3. D(Treasury_Fed_Bill)t 4. D(Treasury_Fed_Bill)tDNegative 5. D(Treasury_Fed_Coupon+TIPS)t 6. D(MBS_Fed)t 7. D(Outstanding issuance)t 8. (Tb10yr-Tb3m)t 9. D(HY OAS)t

Treasury

MBS

Corporate Equity

Corporate Bond

Open Market Paper or CP

Municipal Securities and Loans

Checkable Deposits and Currency

6672.56 0.23 0.08 0.72 0.85 1.41 12473.26 0.33 0.04 1.13 0.39** 2.12 0.21** 2.39 2621.95 0.26 170.59

3447.77 0.14 0.13 1.18 0.11 0.26 25031.85 0.82 0.05** 2.14 0.30** 2.32 0.08 0.94 8414.71 1.23 289.65**

63557.19 1.45 0.03 1.36 1.92** 2.27 164888.40** 3.03 0.03 0.61 0.03 0.12 0.40** 7.87 14777.62 1.11 219.43

150235.50** 3.25 0.17* 1.87 0.68 1.06 27035.77 0.68 0.04 1.16 0.29* 1.63 0.72** 8.10 18890.25* 1.67 227.48*

1734.24 0.91 0.70** 8.76 0.10** 2.56 1643.27 0.57 0.00 0.97 0.05** 5.07 0.05** 4.51 227.55 0.38 7.71

36973.42** 6.77 0.00 0.04 0.19* 1.73 7,639.12 1.09 0.00 0.80 0.04 1.24 0.97** 56.03 6,946.16** 3.92 12.70

17061.72 1.11 0.00 0.02 0.38 1.18 47916.00** 2.37 0.04** 2.29 0.02 0.26 0.22** 3.66 100.51 0.02 48.26

(continued on next page)

244

S. Carpenter et al. / Journal of Banking & Finance 52 (2015) 230–244

Table 8 (continued) HH

10. D(VIX)t 11. D(MSCI)t 12. Number of observations 13. Adjusted R2

Treasury

MBS

Corporate Equity

Corporate Bond

Open Market Paper or CP

Municipal Securities and Loans

Checkable Deposits and Currency

1.51 8784.84** 4.15 381.34* 1.75 47 0.36

3.63 6630.19** 4.47 958.44** 6.02 47 0.51

1.46 5627.69* 1.72 702.86 0.78 47 0.97

1.87 7034.01** 3.16 660.24* 2.82 47 0.44

1.20 204.25 1.59 18.29 1.38 47 0.75

0.67 268.36 0.70 70.34* 1.76 47 0.98

0.88 3684.19** 3.36 270.34** 2.37 47 0.34

Pension funds

1. Constant 2. Lagged Dependent variable 3. D(Treasury_Fed_Bill)t 4. D(Treasury_Fed_Bill)tDNegative 5. D(Treasury_Fed_Coupon+TIPS)t 6. D(MBS_Fed)t 7. D(Outstanding issuance)t 8. (Tb10yr-Tb3m)t 9. D(HY OAS)t 10. D(VIX)t 11. D(MSCI)t 12. Number of observations 13. Adjusted R2

Treasury

MBS

Corporate Equity

Corporate Bond

Open Market Paper or CP

Municipal Securities and Loans

Checkable Deposits and Currency

Fed Funds and Security Repos

2639.31 0.83 0.22** 2.11 0.10 1.43 5145.71 1.22 0.01 1.45 0.08** 3.28 0.02** 2.64 1454.91 1.31 10.09 0.79 359.31 1.58 11.55 0.47 47 0.60

9568.65** 2.09 0.40** 4.05 0.04 0.53 8487.99 1.56 0.01** 1.95 0.05** 2.36 0.01 0.92 467.39 0.37 13.49 0.99 209.38 0.77 45.12 1.57 47 0.41

13491.59 0.95 0.01 0.46 0.87** 3.13 30680.03* 1.73 0.03** 2.61 0.29** 3.85 0.10** 6.35 5453.12 1.24 188.91** 3.86 506.67 0.48 1096.31** 3.99 47 0.98

7921.94 1.20 0.35** 3.20 0.14 1.45 3266.70 0.56 0.00 0.20 0.03 1.18 0.00 0.36 1895.60 1.15 15.52 0.87 314.22 0.97 39.67 1.14 47 0.26

767.37 0.46 0.02 0.19 0.00 0.15 273.15 0.11 0.00 1.11 0.01 0.88 0.04** 4.36 342.65 0.65 0.65 0.12 187.86* 1.73 23.13** 2.03 47 0.28

413.11 0.80 0.10 0.90 0.00 0.04 252.40 0.38 0.00 1.19 0.00 0.22 0.00 0.98 47.23 0.28 1.36 0.75 20.97 0.57 6.06 1.58 47 0.07

341.65 0.61 0.18** 2.00 0.02* 1.69 2055.28** 2.74 0.00 0.47 0.01* 1.76 0.00 1.46 169.55 0.90 2.89 1.40 50.53 1.23 9.15** 2.14 47 0.05

717.23 0.60 0.17 1.55 0.02 0.99 3612.49** 2.32 0.00 0.60 0.02** 2.83 0.42 0.42 525.14 1.34 16.11** 3.91 155.15* 1.86 9.79 1.07 47 0.08

t-Statistics (based on SUR estimation) are below the coefficient estimates. * Indicates significance at 90% level of significance. ** Indicates significance at 95% level of significance.

intend to say this is the last word on this topic but we aim to generate interest and start a fruitful discussion. A greater understanding of the time lag of how Federal Reserve asset purchases eventually affect private sector holdings is still required. Moreover, although these results may be consistent with a preferred habitat theory and the portfolio rebalancing channel to monetary policy transmission, the link is not definitive and more work will need to be done to tie these empirical results to theoretical models.

References Chen, Han, Cúrdia, Vasco, Ferrero, Andrea, 2012. The macroeconomic effects of large-scale asset purchase programmes. The Economic Journal 122 (564), F289– F315, features (November). D’Amico, Stefania, King, Thomas B., 2013. Flow and stock effects of large-scale treasury purchases: evidence on the importance of local supply. Journal of Financial Economics 108 (2), 425–448.

Gagnon, J., Raskin, M., Remache, J., Sack, B., 2011. The financial market effects of the Federal Reserve’s large-scale asset purchases. International Journal of Central Banking 7 (1), 3–43. Ihrig, J., E. Klee, C. Li, B. Schulte, M. Wei, 2012, Expectations about the Federal Reserve’s Balance Sheet and the Term Structure of Interest Rates, working paper. Kapetanios, George, Mumtaz, Haroon, Stevens, Ibrahim, Theodoridis, Konstantinos, 2012. Assessing the economy-wide effects of quantitative easing. The Economic Journal 122 (564), F316–F347, features (November 2012). Krishnamurthy, A., Vissing-Jorgensen, A., 2011. The effects of quantitative easing on interest rates, brookings papers on economic activity. Fall 2011, 215–265. Li, C., Wei, M., 2013. Term structure modelling with supply factors and the Federal Reserve’s large scale asset purchase programs. International Journal of Central Banking. Polkovnichenko, Valery, 2005. Household portfolio diversification: a case for rankdependent preferences. The Review of Financial Studies 18 (4), 1467–1502 (Winter). Vayanos, D., J.-L. Vila, 2009. A Preferred-Habitat Model of the Term Structure of Interest Rates. Working Paper. Wright, Jonathan H., 2012. What does monetary policy do to long-term interest rates at the zero lower bound? The Economic Journal 122 (564), F447–F466, Features (November).