Diminishing Returns of QE from Portfolio Rebalancing

Abstract

The author shows in a CAPM framework that asset risk can be a serious impediment for the portfolio rebalancing channel of quantitative easing (QE). Investors are less willing to take higher risk when excess returns decline due to asset purchases by the central bank. The reduced effectiveness of QE holds in particular when credit spreads are compressed. This can explain why QE has diminishing returns.