Impacts of a Buyer of Last Resort in Equity Markets: Evidence from Japan

Abstract

Since December 2010, the Bank of Japan (BOJ) has unveiled an unprecedented form of quantitative easing, buying and holding large blocks of equity in domestic firms and in turn, becoming Japan's largest single owner of equities. This paper uncovers a novel mechanism stemming from this policy: using the price-weighted nature of these purchases as a source of quasi-exogeneous variation, I show that the BOJ reduces the downside volatility and increases the prices of equities, leading to an influx of actively managed institutional investors. I then establish that the BOJ-driven price changes that these investors react to deteriorate price informativeness, suggesting that informed investors actively capture, as opposed to correct the non-informational price pressure exerted by the BOJ. These results question the efficient markets notion that informed investors stabilize prices.