Bank of Japan Intervention and its Impact on Price Efficiency of Underlying Stocks in ETFs

Abstract

Price efficiency of stock market is one of classic stories in financial and economics world. This paper aims at quantitatively identify the impact of government intervention in stock market on price efficiency of the stocks rather than testing whether stock market is efficient or not. The government intervention in this paper is the intervention from the Bank of Japan to stimulate Japan’s economy through the purchase of ETFs. First, we test whether price efficiency of the underlying stocks in ETFs are improved or deteriorated as a result of the intervention. The results suggest that in aggregate stocks with high exposure to the BOJ purchase do not significantly relates to higher or lower level of price efficiency. Then, we further categorize stocks into groups according to their weight exposures to the purchase ranking from lowest/low/moderate/high/highest exposure and test the impact of the BOJ purchase of each groups on the price efficiency and find that the BOJ intervention causes price efficiency of stocks that are not affected from the purchase to be worsen. In contrast, price efficiency of stocks that are the BOJ targets have been improved significantly. Moreover, stocks in groups with higher exposure to the purchase are faced with more improvement in price efficiency especially from stocks with no exposure to stock with low and lower exposure. However, as the exposure increases further, we found no significant difference in the increase of price efficiency.