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Abstract

This paper estimates the effect of Quantitative Easing (QE) in the United States on the stock prices in emerging economies. We especially focus on China. The spillover effect of QE shock to stock markets in other emerging economies is also discussed. The estimation is done in two steps. We first select one best measurement of QE policy to be implemented in the subsequent analysis. Then we use the selected QE measurement to fit a structural VAR model to study the response of stock market in China to the QE policy shocks. We estimate the model with both short-run and long-run restrictions under various identification schemes to evaluate sensitivity of our results. Our empirical results show that the QE policy shock significantly increases the stock prices in China in both short and long term. Our analysis provides empirical evidence on the influence and transmission channel of unconventional monetary policies. Based on the result, we suggest that Chinese government should implement proper regulations to the domestic overheating stock market in reaction to the U.S. QE shock.

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