Funding for Arts Council in Ireland

Funding for Arts Council in Ireland Oskar van der Grijn   The hackers guide to Arts council funding Abstract This research paper will provide a thorough account of the different financial components comprising of the arts council of Ireland. An investigation will be held into how the arts council of Ireland is specifically funded and by what means it financially allocates to the arts itself. In addition, a detailed analysis of how the arts council manages its finance will be conducted, both in relation to its decision-making processes and also in relation to how finances are directed internally within the organisation. The research methodology of this paper will comprise of primary research in the form of an interview with past board member Jane Dillon Byrne which will run throughout the paper strengthening my research as well as secondary research in the form of collated broadsheet publications, the councils website and its annual financial statement report from 2016. The aim of this paper is to provide a comprehensive account as to how all finance is administered under the arts councils c ontrol and to inform future applicants of the councils practises and procedures for applications in 2017. Introduction The Arts council of Ireland was first established in 1951 by the Irish government in order to encourage interest in Irish Art. In doing so it recognised that the arts have a central and distinctive contribution to make to Irelands evolving society. The primary goals of the organisation are to stimulate public interest in and to promote the knowledge, appreciation and practise of the arts. A vast range of practises such as visual art, music, performance, dance, film and literature as well as many others such as the recent inclusions of Circus and Architecture are all included in the organisations mission and strategy every year and all are largely funded. In order to successfully meet and finance their targets the Arts council established a voluntary body of 12 members and a chair that is appointed by the minister for Arts, Heritage and the Gaeltacht for a term of five years. In addition, a staff of 41 full-time professionals carry out the daily functions of the organisation and these individuals provide expertise and strategic advice on different aspects of the arts. (village magazine, 2016) The nature of this particular organisation is a company limited by guarantee, which means the council is not funded through share capital or shareholders. In order for each department of the arts organisation to run sufficiently it is funded by the Irish Exchequer as well as substantial income being received from the national lottery and additional sources such as disclosed trust funds which contribute to the councils annual budget. These large sums are annually allocated across the different creative sectors in the form of bursaries, grants, art schemes and development programmes in order to promote the development of Irish art. Arts council funding is also allocated abroad under specific programmes such as an Aosdanna in order to promote Ireland in both a traditional and contemporary manner over seas. Having revised the financial schemes and directives of this organisation through secondary research, combined with a thorough understanding of the internal mechanics obtained through an interview with Jane Dillon Byrne, I will conclude with a comprehensive evaluation of the organisations financial structure outlining all key areas of concern. 1. Funding schemes to the Arts The council supports a vast range of schemes and programmes across a widely diverse arts sector. In order to classify each and every segment of funding for 2017 the council has divided its allocations into three different sectors and five funding amounts. Jane Dillon Byrne stated that; This gives significant clarity to the enormous span of financial appropriation and provides a means of adequate accessibility to those who wish to make grant applications within their respected field for 2017 This section of the research paper will outline, using examples, a clear indication of some of the different areas in which funding is allocated in the form of schemes and programmes. The schemes/programmes are broken into three categories; these include (1) Art form, (2) Cross Art form practisesand (3) Strategic developments. The strategic development programme is a significant plan that comprises many elements including the funding of both previously stated art forms and cross art form practises, this plan is devised as part of the councils new 10 year strategy and will be assessed in detail in the later part of this section. In addition to these categories are the financial subcategories that are awarded to successful recipients; these are broken down into five funding allocations as seen below;  £1  £20,000  £20,000  £30,000,  £30,000  £50,000,  £50,000  £100,000  £100,000 + An awarded recipient(s) receives funding in the combined form of one of the three introductory categories and one adjoining subcategory sum. Examples are as follows; 1(a) = (1) Art form (a) Subcategory  £15,000. 2(b) (2) Cross art form practises (b) Subcategory  £20,000. 3(c) (3) Strategic Developments (c) Subcategory  £450,000 Applications are made to the arts council via its website where a body of panellists assigned to each particular category make a collective decision surrounding the award or refusal of financial aid. If approved, the panel assigned to that particular art form also dictate the amount awarded to each individual(s) within that categories specific budget for that calendar year. More information relating to the panellist, decision-making and budgeting process can be found in the management of funding section of this paper. The funding pool for specific awards varies in amounts from year to year as does the annual budget produced by the government along with other means of income such as trust funds and third party contributions from the national lottery. The larger the amount of funding the council receives each year the more types of awards it can then sanction. Likewise, with cut backs, where arts funding is reduced, so are the amount of awards available. 2016s budget amounted to  £60.1M (Mackin, 2016) Evidence of the annual rise and fall in funding can be made with regard to an online statement made by the council in 2015. For the first time in six years, the Arts Councils own Exchequer grant was maintained at 2014 levels ( £56.668 million), and, anticipating future increases in investment, the Council was mindful in its allocations to help position the arts to benefit from, and play a full part in, the national recovery (www.artscouncil.ie, 2015) 2. Categories (a) Art form The art form category is the most expansive category and covers a range of practises such as Visual art, Circus, Opera, Street and performance, Traditional, Theatre, Music, Film, Architecture, Literature and Dance. Within each of the practises are numerous awards, bursaries and grants. The many variations of awarded grants cannot all be listed within this concise paper. However, what is apparent are the large number of applications which are completed every year. As a result, the awarding system is broken down into Round 1 and Round 2. Below are examples of specific art form grant recipients for 2016, which are identified as bursaries, both in the form of Visual Arts and Dance. (www.artscouncil.ie, 2016) The purpose of the bursary award is to support professional artists to develop their art practice. It provides artists with the time and resources to think, research, reflect and critically engage with their art. The maximum amount awarded is  £15,000. Having thoroughly analysed all the granted bursary awards for 2016 from the arts councils website, I have collated the amount awarded to each recipient of each art form and used their data to develop a chart representing the distribution margins. See below for 2016s round 1 and round 2 distributions. Round 1. Round 2. The most evident representation of these graphs lead to the heavy percentage in favour of the visual arts. The combined % of both round bursary allocations amounts to just shy of 43% of the overall 2016 bursary budget. (280,392+204,750)/(739,353+397,005) x100= 42.6% In addition, the % of the total bursary allocations for 2016 as a % of 2016s entire budget of  £59.1 million was just shy of 2%. (739,353+397,005)/59,100,100100=1.92% (b) Cross Art form Practises The Cross Art form practises are the second category of funding provided. It entails a more complex awarding system when contrasted to the individual artists bursary award and usually grants higher sums due to the larger size of organisations involved. The areas recognised within this funding initiative are Venues, Touring, Local arts, Festivals and events, Arts Participation and Young people, children and education. This funding can be applied for under Group, individual, local authority or organisation type. The festival and events scheme is an example of a cross art form practise award with a maximum sum of  £20,000, it can only be applied for under an organisation application type. This means that the application type may be collaborative or singular but must be made in the name of the organisation at hand. An interesting financial factor surrounding this application type, which also applies to other categories within the art form practises category, are the two awarded strands of funding available. Strand 1 funding amounts to  £10,000 and strand 2 amounts to  £20,000. Selection of the correct strand during applications must be adhered to; an excerpt, 1.6, taken from the second strand application form can be seen below; these strands also apply to other schemes under the same guidelines across the cross art form practises category. The strands can be defined as follows Festivals previously funded by the Arts Council under this Scheme up to  £10,000 in their last funding offered must apply to Strand 1. Festivals previously funded by the Arts Council under this Scheme between  £10,001 and  £20,000 must apply to Strand 2.(www.artscouncil.ie, 2017) Section 1.6 of Strand application 2 This guideline of financial stranding is to help the council articulate who has been already funded previously and by what amount. This provides clarity not only financially but also provides an even playing field for emerging festivals who are easily overshadoweed by successful applicants from previous years. See examples of 2016 succesful reciepts and amounts awarded below: (www.artscouncil.ie, 2017) (c) Strategic Development The strategic development plan is a much broader funding scheme and runs in accordance with the arts councils new strategy first outlined in September 2015. The published strategy is called: Making Great Art Work: Leading the development of the arts in Ireland (2016-2025) Jane Dillon Byrne stated that: The strategy prioritises the artist and public engagement, and looks to develop the conditions, infrastructure and environment to enable artists and organisations to make great work and to encourage people to access and participate in that work. (Dillon-Byrne, 2017) The main elements of the councils investment of  £60.1m for 2016 are as follows:  £32m to 195 arts organisations.  £1.4m in Touring  £180k in a new Emerging Artist Bursary Scheme  £1.72m in regular funding to local authorities  £350,000 to establish a new local authority partnership scheme  £316,000 Ealain na Gaeltachta  £5.2m to Venues in every county throughout the country  £2.6m awarded to festivals  £2.24m awarded to literature organisations  £4m to visual arts with  £500,000 specifically assigned for bursaries  £6m awarded to Theatre  £1m to support multi-disciplinary projects Below are two tables I have conducted which represent 2016s data levels of expenditure. Table 1 represents the overall artistic fields and table 2 represents the individual organisations. Table 1. Arts organisations accounted for over half of 2016s total budget at 54.1% 32/59.1100=54.1% Table 2. In addition, regarding the most prolific individual organisations, the council have largely kept their funding similar if not the same to 2015s budget. The Druid Theatre Company saw its grant maintained at  £762,000, as did the Opera Theatre Company with  £680,000, Music Network at  £515,000 and Rough Magic at  £480,000. The Project Arts Centre was given a small rise as it celebrates its 50th year, its funding was increased by  £26,250 to  £675,250. (Mackin, 2016). 3. Tax exemption and appeals One of the most important advances, and one which undoubtedly receives attention in this paper, is how the artist tax exemption is currently being reviewed, and how it will continue to be reviewed in the future. Charles Haughey brought the guidelines for the artists exemption into place in 1973 to support local talent and to attract artists to settle in Ireland. They exempt artists from paying tax on the proceeds of original works. Likewise, all awards given in aid of artistic development from the council, similar to that of earnings, are also tax-free. Having conducted much research into the field of artist taxation some interesting findings have come to surface, the tax exemption may well be in line for future tweaking. The Irish Times states in a publication late last year that; In 2011, a cap of  £40,000 was placed on the amount of artists income exempt from tax every year. This was increased to  £50,000 from January 1st, 2015 and it is described in the report as a more targeted scheme, aimed at supporting artists on low incomes. (Hancock, 2016) Jane Dillon Byrne added The legislation allows the Revenue Commissioners to make determinations in respect of a range of artistic works, including a book or other writing, a play, a musical composition, a painting or a sculpture. It must be noted that the intervention of revenue in the artistic decision making process is a sensitive matter for the arts council (Dillon-Byrne, 2017)Further information regarding this can be found in theappeals section under this heading. Information published by the Irish Times, stated that in 2014, which is the most recent year for which data is currently available regarding artist taxation, states that; 2,640 artists availed of the exemption at a cost of  £5.8 million to the exchequer. Thats an average of just under  £2,200 each (Hancock, 2016) A review was undertaken for last years budget, with a recommendation from the Department of Finance to review the scheme, with a view to possibly introducing income averaging for artists. The budget document stated it recognises where the profit level is increasing, and that income averaging would reduce the amount of tax to be paid and improve cash flow in the short term, similar to that of farmers, who utilise from a current system, under the common agricultural policy (CAP). Having personally assessed the value of such a change I would have to argue as to what would happen if profit levels reduce and tax liability is increased when compared with the actual liability for that year alone. How will artists respond to this, as well as being thrown into the same pen as farmers. (Hancock, 2016) Appeals Arts council applicants can appeal against a funding decision on the basis of unfair application, alleged infringement or a deviation from the councils published procedures. Like all financial processes there is an application format that must be adhered to. Firstly applicants must show that they have reasons to believe that their application was dealt in an incompatible manner. Secondly the applicant must contact the head of the team or service dealt with previously. In the case of a second financial rejection, the applicant has an additional opportunity to appeal the decision; this must be made directly to the director of the arts council. Having spoken with Jane she made it apparent that in the past there has been controversy surrounding the appeals decisions and processes, particularly in the field of literature where taxation, or tax evasion has come into question. Disputes between revenue and the arts council, where the arts council has argued that the latter has undermined its role in the artistic assessment of works has come to surface in recent years. New correspondence released under the Freedom of Information Act has revealed the level of exasperation within the Arts Council about both the number and type of non-fiction books that are granted the artists exemption. The revenue commissioners guidelines state that non-fiction books should be considered if they are on an artistic or cultural theme such as a biography or autobiography of a writer or painter. (See section 195 of taxes consolidation act in appendices) However a past publication from the Irish times states that: Sportspeople including Irish rugby out-half Ronan OGara, Kilkenny manager Brian Cody, GAA manager Mick ODwyer and pundit George Hook have also received the exemption, though the Arts Council does not believe sports books should qualify (www.irishtimes.com, 2013) In addition, the arts council advises the revenue commissioners on whether a book should be eligible. It claims to provide expert advice in the event of an appeal by an author, yet during my research I came across an additional excerpt from the Irish times which puts the credibility of its assessment further into question; Between 2004 and last year there were 46 appeals by writers who were judged to be ineligible for the tax exemption by the Arts Council and the majority (56 per cent) succeeded in their appeals (www.irishtimes.com, 2013) From this guideline, I would advise anyone who has applied in the literacy category and who has been refused in 2017 to appeal their decision. You have a 56% chance that you will be awarded your desired funding. In addition, literature is the second highest percentage bursary allocation. If we refer to my graphs in the art form section we can come to the conclusion that literature makes up (172,550+43,420)/(739,353+397,005) x100=18.9% of 2016s Bursary award. 5. Conclusion Having researched this topic thoroughly some very interesting conclusions can be drawn. First and foremost the annual budget presented by the department of Arts, Heritage and Culture is the deciding factor regarding allocation amounts to the different sectors of the arts. This budget rises and falls every year. A huge emphasis today is put on the strategic development plan titled creating good artwork (2016-2025). This plan holds the councils best interest at heart and this can be seen in its allocations last year of over  £31 million to organisations across the country totalling 54.1% of the overall budget. In addition the artists bursary is still a huge element of the councils funding and decision making process with 1.9% being allocated across the arts to individual artists. This is a significant sum considering the diversity of the councils awarding system. Visual arts still remains the primary area of funding regarding the bursary amounting to 42.6% with literature coming in as the second most popular at 18.9%. What are also very interesting are the examples of controversy surrounding revenues relationship with the arts council. When one considers the arts council they are led to believe that it is an organisation who are fully committed and effectively competent in performing their duties, and for the most part they are just that, however in the past instances such as Bertie Aherns tax exempt biography as well as many others show that there still can be elements of political will creeping through what appears to be a well run organisation. As long as the artists tax exemption exists under section 195 of the taxes consolidation act, I believe there will always be a clash of interest between the exchequer amounting pressure on the council and the council defending its position as the governing body for the arts. Appendices 1. Taxes consolidation act 1997 for the Artists Exemption Scheme. (www.revenue.ie, 1997) 2. Management of funding Having spoken to Jane Dillon Byrne, and in particular about her position as a past board member for the arts council from 2002-2007 I gained a valuable insight into how the management delegates funding within the organisation. The annual report gives evidence to where exactly past funding has been allocated, however, it does not give an account of the decision making process and the individuals involved who are responsible for the funding reaching its final destination. Jane described the organisational structure of the company and used this as a template to further expand on the financial decision making elements of the organisation. Similar to most businesses there is a director of the organisation, the director divides the council into a number of committees and each committee appoints an arts officer, 11 in total, one for each art form. There is an additional officer, the finance officer, who takes into consideration the expertise of the other 11 officers and essentially pushes the red button when the final financial decisions are made. Within these committees panellists are chosen for each art category and art form, there can be any number of panellists for each art form, which can include invited guests, however there generally is around 5 panellists. Jane went on to describe how the funding is then decided amongst the organisational structure. The annual budget which has been assigned by the department of Arts, Heritage and Culture is presented to the board, the board members along side the 11 arts officers, the finance officer and the director decide the sector allocations. From this point the panellists assigned to each art form then decide on the individual artist/organisation allocations. (Dillon-Byrne, 2017) In addition, Jane continued to talk about how the council currently employs 41 full time staff who are all paid via the exchequer. I went on to ask Jane were the board members, the arts officers and the director paid, Jane stated that Board members are not on salaries, however they do receive perks such as transport, accommodation, lunch, dinner, drinks and so forth, essentially board members are well looked after surrounding the dates that they are working within and for the council. The director however does receive a complementary fee of in around  £5,000-10,000 euros depending on the year (Dillon-Byrne, 2017) 3. Payment templates One of the conditions of being a successful applicant to council awards such as bursary awards, commissions awards and project awards is that the recipients must report on their award and supply receipts and other financial information regarding their expenditure to the council. If we take for example the artists bursary award, a recipient will receive two documents along with their letter of offer, which clearly outlines a payment guide and the terms and conditions of the arts councils funding. This process ensures that the council is fully up to date with how the artist manages their financial award and prevents misconduct on the behalf of the artist where the may use the finance for means not related to their work. The appendices section of this paper provides an example of an income and expenditure report. Similarities can be drawn between this income and expenditure form to the profit and loss balance sheets our class as arts management students have worked with over the last 4 years on excel. 3. Income and expenditure report Dillon-Byrne, J. (2017, February 19th). Arts council funding. (O. v. Grijn, Interviewer) Dublin, Leinster, Ireland. Hancock, C. (2016, October 13th). www.irishtimes.com. Retrieved February 27th, 2017, from www.irishtimes.com: http://www.irishtimes.com/business/budget-2017/artists-tax-exemption-may-be-in-line-for-a-future-tweaking-1.2828887 Mackin, L. (2016, January 4th). www.irishtimes.com. (The Irish Times) Retrieved February 27th, 2017, from www.irishtimes.com: http://www.irishtimes.com/culture/art-council-announces-spending-for-2016-1.2484751 village magazine. (2016, December). www.villagemagazine.ie. Retrieved February 15th, 2017, from www.villagemagazine.ie: https://villagemagazine.ie/index.php/2015/03/our-top-heavy-arts-council/ www.artscouncil.com. (2016, January 04th). Retrieved February 27th, 2017, from www.artscouncil.com: http://www.artscouncil.ie/News/Arts-Council-announces-its-investment-strategy-for-2016-to-develop-the-arts-across-Ireland/ www.artscouncil.ie. (2015, January 8th). www.artscouncil.ie. Retrieved February 25th, 2017, from www.artscouncil.ie: http://www.artscouncil.ie/news-details.aspx?id=15994 www.artscouncil.ie. (2016, December 11th). www.artscouncil.ie. Retrieved February 23rd, 2017, from www.artscouncil.ie: http://www.artscouncil.ie/funding-decisions/ www.artscouncil.ie. (2016, December 19th). www.artscouncil.ie. Retrieved March 2nd, 2017, from www.artscouncil.ie: http://www.artscouncil.ie/Funds/festivals-and-events-scheme/ www.artscouncil.ie. (2017, January 9th). www.artscouncil.ie. Retrieved February 26th, 2017, from www.artscouncil.ie: http://www.artscouncil.ie/Funds/festivals-and-events-scheme/ www.irishtimes.com. (2013, January 3rd). www.irishtimes.com. Retrieved February 26th, 2017, from www.irishtimes.com: http://www.irishtimes.com/news/revenue-brought-to-book-on-exemption-scheme-1.953528

Essay --

In 1199 Richard died, and John claimed the throne of England. He was accepted by Normandy, and his mother secured Aquitaine, but his claim to the rest was in trouble. He had to fight and negotiate and he was challenged by his nephew Arthur. In concluding peace, Arthur kept Brittany (held from John), while John held his lands from the King of France, who was recognised as John’s overlord on the continent, in a manner greater than was ever forced out of John’s father. This would have a crucial impact later in the reign. However, historians who have cast a careful eye over John’s early reign have identified a crisis had already begun: many nobles distrusted John because of his previous actions, and doubted whether he would treat them correctly. The marriage to Isabella of Gloucester was dissolved because of alleged consanguinity, and John looked for a new bride. He found one in the form of another Isabella, heiress to Angoulà ªme, and he married her as he tried to involve himself in the machinations of the Angoulà ªme and Lusignan family. Unfortunately Isabella had been engaged to Hugh IX de Lusignan and the result was a rebellion by Hugh and the involvement of French King Philip II. Had Hugh married Isabella, he would have commanded a powerful region and threatened John’s power in Aquitaine, so the break benefitted John. But, while marrying Isabella was a provocation to Hugh, John continued to snub and anger the man, pushing his rebellion. In his position as French King, Philip ordered John to his court as he could any other noble who held lands from him, but John refused. Philip then revoked John’s lands and a war began, but this was more a move to strengthen the French crown than any vote of faith in Hugh. John began by capturing a ma... ...ution. These talks took place at Runnymede, and on June 15 1215 agreement was made on the Articles of the Barons. Later known as Magna Carta, this became one of the pivotal documents in English, and to some extents western, history. In the short term, Magna Carta lasted just three months before the war between John and the rebels continued. Innocent III supported John, who struck back hard at the baron’s lands, but he rejected a chance to attack London and instead wasted the north. This allowed time for the rebels to appeal to Prince Louis of France, for him to gather an army, and for a successful landing to take place. As John retreated north again rather than fight Louis he fell ill and died. This proved a blessing for England as the regency of John’s son Henry were able to reissue Magna Carta, thus splitting the rebels into two camps, and Louis was soon ejected.

Evidence Based Management Essay

Using evidences or facts to run the organization is not a new concept in the management practice. Some managers use their experiences, research, articles and other evidences conducted by business experts to make decisions in their organization. Using these evidences to create solutions to solve problems in the organization is known as evidence-based management (EBMgt). For the proponent of EBMgt, this decision–making process has some advantages in its implementation. Creating a good quality decision is a linear function with an improvement of data and information that are used as decision supports. Having reliable evidences and using systematic process, managers can create a better managerial and organizational decisions. In this good environment, organizations also will perform with a flexible way in implementing all decisions because they are resulted from numerous good researches. Finally, this model also will create a learning environment for managers to improve their comp etence to make a good decision. For the opponent of EBMgt, this practice is hard to be implemented in the organization because some reasons. Sometimes, it seems too much information for managers to consider as decision supports. Furthermore, from those data, managers frequently feel difficult to pick the reliable information. When managers think that they have a good evidence, sometimes they cannot use it as their decision support because it is not relevant to their organization in certain conditions. Lastly, managers frequently fall into the wrong business practice because a half-done solution that is offered by consultants. After that, managers often see other consulting firms to try misleading. To understand more deeply about EBMgt, let’s see an example of PT KAI, the Indonesian state-owned company that operate railways. Since the last four years, management of PT KAI has changed the company from getting loss USD 8.5 Million in 2008 to having profit more than USD 45 Million in 2013. The remarkable change in the company could not be separated from many innovations that has been applied by its management. In 2009, the management did some researches and survey about the company’s problems causing the lack of revenue. After that, they found two main issues that were human resources and services problem. To solve the first problem, the management applied the meritocracy system in its human resources system.

Impacts Of Us Quantitative Easing On Financial Assets Finance Essay - Free Essay Example

Sample details Pages: 21 Words: 6380 Downloads: 8 Date added: 2017/06/26 Category Finance Essay Type Narrative essay Did you like this example? On July 24, 2009, Federal Reserve unleashed its recent quantitative easing (QE) campaign. Fed Chairman Ben Bernanke declared that the Fed had an exit strategy. Interestingly, sixteen months later, Bernanke announced the second phase of QE generally known as QE2.  However, this time instead  of  pretending an exit strategy, he designed a plan to expand the program in perpetuity. The markets initial dramatic reaction was most surprising. Don’t waste time! Our writers will create an original "Impacts Of Us Quantitative Easing On Financial Assets Finance Essay" essay for you Create order The Fed is going to be buying (QE2) 600 billion dollars of Treasuries (in the 5-7 year part of the curve) through mid-2011 and another 250-300 billion via coupon reinvestments.   The number that is key for the markets is that 600 billion dollar figure which is about 75 billion per month. That is in the middle of consensus expectations of 50-100 billion dollars.   For all the excitement, this further expansion of the Fed balance sheet will add between 0.25 and 0.5 pct to real GDP growth if it proves to be successful. What the Fed is clearly trying to do is inflate asset values in order to generate a more positive wealth effect on personal spending and pull the cost of debt and equity capital down in order to re-ignite business animal spirits and hence corporate investment and hiring.   Under the QE program the Federal Reserve is purchasing Treasuries, Agency and Agency Mortgage Backed Securities of different maturity scedule. There is substantial evidence that QE program can influance long-term interest rates. For example, Gagnon, Raskin, Remache, and Sack (2010) present an event-study of QE1 that documents large reductions in interest rates on dates associated with positive QE announcements. Apart from the event-study evidence, there are papers that look at lower frequency variation in the supply of long-term Treasuries and documents causal effects from supply to interest rates (see, for example, Krishnamurthy and Vissing-Jorgensen (2010)). The main objective of this paper is to evaluate the theoretical channels through which the unconventional monetary policy (QE) works. I review the key channels through which QE operates and then investigate the impacts of QE on different financial assets using the event-study method. In our event-study method I observe the changes in asset prices and yields. I furthermore supplement previous works by adding evidence from QE2 and stochastic forecasting models. Studying daily data allows us to document price reactions after the main announcements. 2. Literature Review 2.1 Theoretical Studies A monetary policy such as Quantitative Easing program by a central bank would change the supplies of assets held by the market agents and, thereby, may lead to changes in the relative prices of financial assets. This is called portfolio-rebalancing effect. On the other hand if the market agents believe the central bank interference will be successful in stimulating the economic growth by increasing aggregate demand then inflation and dividends on assets are likely to rise in the future which is known as expectation-hypothesis. Doh (2010) refers to imperfect substitutability between assets and explains the expansionary effect of QE announcement decision by arguing that the buy-back program of long-term treasuries by the central bank will tend to lower yields of long-term bonds, because the central bank purchases those securities or assets at a higher price than the market charges. This lower long term yield on treasuries can be explained by theory of portfolio rebalancing effect to ot her asset markets, such as equity and corporate bond market. Investing in longer-term assets becomes relatively cheaper and hence stimulates the aggregate demand. Essentially, the central bank interferes into the conventional interest rate determination mechanism by directly lowering long-term yields. Being constrained by the zero-lower-bound, the conventional interest rate channel that usually catalyzes lower long-term yields through the expectations hypothesis does not function properly and the central bank outwits this by directly arbitrating in the market for long-term bonds. He found that the central banks large-scale purchases of the bonds can decrease the term premium on fixed income securities. The magnitude of the decline in term premium depends on the risk aversion nature of the market agents. If the risk aversion is high, large-scale asset purchases can induce more substantial decline. Hence, the success of the portfolio rebalancing theory would depend on the risk aversio n level of the market agents. However, he argued that from a theoretical point of view, it is not obvious the yields on long-term treasuries are supposed to drop after announcing Quantitative Easing. From the study of Takeshi Kimura and David Small (2004), we see that QE lowered the key interest rates in Japan. However, the program failed to stimulate the equity market. So, the expectation hypothesis was in effect as far as fixed income securities were concerned. However, because of the high risk aversions of the market agents the portfolio rebalancing effect failed to exert any impact on other asset classes. 2.2 Empirical studies on QE There is by now a substantial amount of research that studies the impact of unconventional monetary policy on capital market variables like interest rates, yield differential or interest rate spread. Some of the recent studies include Bernanke et al. (2004), Hamilton and Wu (2010) and Stroebel and Taylor (2009), Meier (2009), ECB (2010) for the Euro Zone, and Oda and Ueda (2007) and Ueda (2010). Oda and Ueda (2007) found that that the Bank of Japans open market operation under the zero-bound rate environment has functioned primarily through the commitment of keeping the rate low, which had reduced the rates across different maturity schedule. Most importantly, the commitment has been effective in lowering the expectations component of interest rates, especially with short to medium-term maturities. Stroebel and Taylor (2009) examined the quantitative impact of the Federal Reserves mortgage-backed securities (MBS) purchase program. They found evidence of statistically significant effe cts of the program on financial asset prices and on different interest rates. Without losing generality, I can say that these literatures found negative effects on yield differential of unconventional policies such as monetary or quantitative easing, which implies that the dividends or yields of various assets tend to decline, thereby tightening the risk premium spread to the corresponding risk-free return. Hamilton and Wu (2010) found that a buy-back of 400 billion US dollars of US treasuries in 10-year area of the curve would contribute to a 14 bps fall in the 10-year treasury yield. Gagnon (2010) found that the unconventional monetary policy measure would plunge long-term return by 20 bps across the curve. Meier (2009) observed that the Bank of Englands Quantitative Easing program, where asset purchase program lowered inflation-linked-treasuries (gilt) yields by approximately 40 basis points to 1 percentage point (100 bps). Kamada and Sugo (2006) diagnosed the impact of monetary policy shocks by imposing sign restriction on the IR (Impulse Response) functions. In their analyses, they used several macroeconomic variables, such as the consumer price index, industrial production, the exchange rate, yield on 10 treasury, and a proxy variable for monetary policy. Using the asset purchase date they observed the structural changes between February 1978 and April 2005. They showed that the impacts of asset purchase on prices and output weakened in the 1990s. The decline in the impact of Japanese monetary policy is attributable to the non-negativity constraint on short-term rates. Baumeister et al. (2010) estimated the impact of a fall in the long-term treasury yield differential within the context of the 2007-2009 financial recession using a sign restrictions on the estimated parameters. They concluded that a pure spread shock which, leaving the short-term rate unchanged by construction, allows us to characterise the macroeconomic impact of a spread tightening induced by central banks monetary easing program within an environment in which the short-term rate cannot move because it is constrained by the zero lower bound. 2.3 Studies most relevant to my research Recent literatures on US-QE program have focused only on Treasuries. However, in my opinion, it is inappropriate to focus only on Treasury rates as a policy target because QE works through several channels that affect other financial assets as well. Based on this argument, I build several hypotheses that I testify in this paper. Gagnon, et. al, (2010) showed that by reducing the net supply of assets with long duration, the Federal Reserves QE programs appear to have been successful in reducing the risk premium. In addition to this reduction in the risk premium, the QE programs has an even more powerful effect on longer term interest rates on agency debt and agency backed mortgage securities by improving market liquidity and by removing assets with high prepayment risk from private portfolios. They found evidence that the asset purchase program led to economically efficient and long-lasting reductions in longer-term interest rates including financial market assets that were not includ ed in the purchase programs. This plunge in interest rates primarily reflects lower term premiums rather than lower expectations of future short-term interest rates. However, in their study they did not investigate the prices of other financial assets that reflect the effectiveness of portfolio rebalancing effect. In my study we will investigate the portfolio rebalancing effect by exploiting an event study method using the price movements of several financial assets. Krishnamurthy et al. (2010) estimated the effect of QE2, assuming a $500bn size, on nominal long-term interest rates. In their primary hypothesis they expected QE2 would result in a 40 basis point drop in interest rates on long-term safe assets (Treasuries). The rationale behind the hypothesis was there is a unique clientele effect for long duration but risk free assets, and the QE2 would reduce the supply of risk free assets of higher duration and hence would increase the risk premium that such market agents would pay for such assets. They expected a much smaller effect on the nominal interest rates on less safe assets such as Baa rated corporate bonds and mortgage rates. These rates are more relevant for long-term financing from market agents perspective. That is, effects on the duration risk premium, which affects all long-term interest rates, will be much smaller. They concluded that QE1 and QE2 significantly lower nominal interest rates on Treasuries, Agencies and highly-rated corporate bonds, driven mainly by an increase in the safety price premium of assets with near-zero default. To facilitate their research they used credit default swap (CDS) data. In my study I use corporate borrowing spread which directly reflects the health of financial position of the corporations. I also use stochastic interest rate forecasting model to capture the change in evolution of the zero-rate in both pre and post-QE period. 3. Data and Methodology I evaluate the effect of the Federal Reserves Quantitative Easing programs of long-term Treasuries (QE1 in 2008-2009 and QE2 in 2010-2011) on interest rates and other financial assets. I use an event-study methodology that compares the change in asset prices and yield around the event announcement date. In this paper, I use zero-, three- and seven-day window period for my event-study. I conduct my event-study using the data on treasury and corporate yield, SP price index, SP Futures, US-EUR currency rate, Gold price, Inflation Swap rate and VIX index around the event announcement dates. For the event-study method, I use three QE announcement dates for both QE1 (11/25/08, 12/01/08 and 12/16/08) and QE2 (08/10/10, 09/21/10 and 11/30/10) and I compare the relative impacts of these two phases on asset prices. I also use stochastic forecasting method to see the interest rates movement around the QE announcement dates. The QE strategy entails purchasing long-term assets that increases monetary base. Thus, QE increases the liquidity in the hands of investors and thereby decreases the liquidity premium on the most liquid assets. According to the classical bond pricing formula, QE should decrease the yield on all long-term nominal assets more than the assets with short-term maturities due to the duration risk factor. To the extent that QE is expansionary, it increases inflation expectations, and this can be expected to have an effect on interest rates. This effect should be reflected via inflation swap rate. The entire idea behind the QE is to bolster the economic growth and stability. One of the objectives of the program is to create an interest rate environment where the corporations would be able to borrow their capital at a low cost which would in turn improve the health of income statement through the interest expenses account. Again, this would impact the P/E ratio and hence, would increase the equity prices. Under these circumstances, the debt holders would agree to lend capital at a lower premium. Thus, the spread between treasuries and corporate yields should be narrowed down as a result of QE. If the interest rate goes down due to the QE then I should experience a substantial amount of capital outflows (especially, interbank money market instruments) from US to other financial markets where the liquidity premium is higher. Hence, the US exchange rate should drop. In this paper, I use Vasicek (1977) and Cox-Ingersoll-Ross (1985) interest rate models to forecast the zero-coupon interest rates for both pre and post QE period. These models are one-factor models that use short rates to forecast the interest rate movements driven by the market risk. They follow a standard Brownian motion to explain the evolution of the interest rate. Here, I use the historical daily data on short rate from 2006 to 2008 to forecast the interest rate environment for the pre-QE period. I then check the stability of the model for the post-QE period. Details of these models are described in the forecasting section. 4. Event Study As discussed earlier, I am using zero-day (-1,0), three-day (-1,+1) and seven-day (-3,+3) window period in my event-study where I compare the changes in asset prices on the event day as compared to the prices around the event dates using different window period. I use three QE announcement dates for both QE1 (11/25/08, 12/01/08 and 12/16/08) and QE2 (08/10/10, 09/21/10 and 11/30/10). The issue that arises is that I cannot be sure that the identified events are in fact important events, or the dominant events. That is, other significant economic news arrives through this period and potentially create measurement error problems for the event-study. To tackle this problem I have chosen only the first three event dates for each phase. However, inclusion of other dates would not alter my fundamental conclusion. 4.1 Evidence from QE1 Based on our duration risk hypothesis, the yields on longer-term securities in Table 1 drop more than the yields of shorter-term securities. However, I see an exception for the 30 year Treasury bond, where the yield falls less than the 10 year bond. The long Treasury and agency bond yields may fall more than the shorter-term yields because of clientele effect for long-term safe assets. For mortgage backed securities (MBS), long rates may fall more than short rate because of pre-payment nature of the mortgage backed securities. Table 1 Window (-1,0) Change in Treasury Yield (bps) Agency Yield (bps) Agency MBS Yield (bps)    Term-to-Maturity Term-to-Maturity Term-to-Maturity Announcement Date 30 Year 10 Year 5 Year 1 Year 10 Year 5 Year 10 Year 5 Year 11/25/2008 -24 -36 -23 -2 -76 -57 -75 -147 12/01/2008 -27 -25 -28 -13 -67 -50 -10 58 12/16/2008 -32 -33 -15 -5 -39 -26 -30 -7 Change in yield on fixed income securities with a (0,1) window; Source: Bloomberg From table 1, we observe that there are differences in the yield changes across the different fixed income securities; for example, Agency bonds demonstrate the largest fall in yields. The duration risk hypothesis cannot explain these effects as it only explains the effects that depend on term-to-maturity. Also, the trade-off between interest rate risk and credit risk is minimal as far as treasuries or agency backed securities are concerned. The QE strategy involves purchasing long-term securities. Thus, QE increases the liquidity in the hands of investors. With the increased liquidity base and portfolio rebalancing effect, the investors will demand higher premium on liquid assets and will allocate more wealth into risky assets. The most liquid assets in Table 1 are the Treasury bonds. The liquidity premium hypothesis predicts that these yields should increase with QE. However, they do not increase; they actually fall much less than the yields on Agency bonds (these are the bonds issued by government agencies but are not secured by government) which are less liquid. That is the Agency-Treasury spread narrows down with QE1. For example, the 10 year spread falls by 92 basis points. This is interesting because 10 year Agencies and Treasuries have the same default and duration risk based on their underlying covenants and position in the issuers capital structure. Also, it is evident that portfolio rebalancing effect did not take place in a reaction to an event date. This could be explained by the nature of the utility functions of the market agents but to explore that phenomenon is beyond the scope of this paper. To assess the effects on real rates, I need information about the impact of QE1 on inflation expectations. Table 2 presents the relevant interest rate swap data. Here, I use inflation swap rate which is also known as plain vanilla swap. This instrument reflects the inflation expectation of the investors on at different point in time. For example the 10-year inflation swap is the fixed rate in the 10-year zero coupon inflation swap. This data suggests that inflation expectations increased by between 1 and 48 basis points (ignoring the drops in swap rate), depending on maturity. It is difficult to explain the drop in the rate on few occasions. However, the market agents were aware that the Federal Reserve was not going to raise the policy rate anytime soon and hence, the agents demonstrated consistent expectation on longer-term maturity schedule (30 yr). Table 2   Window (-1,0) Change in Inflation Swap Rate (bps) SP 500 Price Index    Term-to-Maturity Announcement Date 30 Year 10 Year 5 Year 1 Year Change in basis points 11/25/2008 1 -6 -28 48 66 12/01/2008 15 27 11 -40 -893 12/16/2008 4 37 35 -17 514 Change in Inflation Swap rate SP 500 Index; Source: Bloomberg QE increases the level of monetary base and consequently lowers the value of the currency. To hedge against the weak currency, large institutions and investors tend to hold gold and this triggers the gold price. The cheaper dollar should stimulate the export demand of locally produced goods. At the same time as QE lowers the corporate borrowing rate which has direct impact on the net income of the corporations balance sheets. These two effects together improve the Price/Earning ratio which is the key multiple closely followed in stock trading. As a result, I should document higher stock prices in post-QE period. At the same time, due to the spot-future price relationship, economic agents would revise their market expectations and hence, the stock futures should rise as well. In table 2 I see that SP 500 reacted immediately to the announcement dates except for one announcement date. On the event day, price index rose from 66 to 514 basis points. Most importantly SP 500 grew by 47% since the initial announcement date to the end of 2010. However, from table 3, I document that the impact on SP 500 futures is quite ambiguous as I observe a frequent change in market movements. However, since the initial announcement date to the end of 2010, the index surged by 47% which is consistent with the growth rate of the price index. It is clear that market agents did not react and revised their expectations overnight on equities. However, I notice the reaction in long term market expectation. The volatility in spot and future indices is also reflected in the VIX index where I see a frequent sign change in the market volatility expectation. Same argument applies to the gold spot price. Table 3 Window (-1,0) VIX Price Index USD-EUR Exchange Rate Gold Spot Price BBB Mid-Yield Spraed (5 Year) Announcement Date (Change in bps) (Change in bps) (Change in bps) (Change in bps) 11/25/2008 -6 -84 -24 -33 12/01/2008 230 65 -448 -28 12/16/2008 -770 -227 148 -2 Change in VIX, USD-EUR, Gold and BBB spread; Source: Bloomberg On the event day, the gold price actually fell by few basis points but it grew by 75% since the initial announcement day to the end of 2010. Except for one event date, US-EUR exchange rate fell by 84 to 227 basis points. In line with treasury and agency yield movements, the BBB rated corporate borrowing rates also fell on the even day. I document that 5 year yield spread fell by 2 to 33 basis points and the reaction was much larger on the QE1 event dates. Table 4 Window (-1,+1) Treasury Yield (5 Yr) BBB Spread (5 Yr) SP 500 Gold Spot Price 11/25/2008 -20 2 4.04% -1.2% 12/01/2008 -27 -28 6.68% -4% 12/16/2008 -11 -29 4.13% -5% Change in 5-Yr treasury yield, BBB spread, SP 500 and Gold price; Source: Bloomberg Using a 3-day window period, from table 4, I see that, the treasury yields drop around all event dates. We also see that the generic spread on BBB rated corporate bonds declined and consistent with the treasury fall. The reaction of SP 500 price index is much more conclusive when we use 3-day window and they are in line with my primary hypothesis. However, the movement in gold price does not demonstrate its actual long term movement when we observe them in shorter window frame. I observe the similar results when I use a 7-day window period (see table 5). This time around gold price does reflect its trajectory since the initial event day to date. Table 5 Window (-3,+3) Treasury Yield (5 Yr) BBB Spread (5 Yr) SP 500 Gold Spot Price 11/25/2008 2 -20 8.48% 10.3% 12/01/2008 -50 -5 -1.3% -4% 12/16/2008 -18 -55 1.64% 0.9% Change in 5-Yr treasury yield, BBB spread, SP 500 and Gold price; Source: Bloomberg 4.2 Evidence from QE2 The QE2 announcement was widely anticipated and one would expect the announcement to have little effect. Prior to the initial announcement for QE2, market expectations were that the Fed would let its MBS portfolio overspill, thereby reducing reserve balances and allowing the Fed to exit from its non-traditional monetary policies. Thus, the announcement of the Feds intent to continue QE revised market expectations. Moreover, the announcement indicated that the QE would shift towards longer-term Treasuries, and not Agencies or Agency backed securities as in QE1. In QE2, I do not observe duration risk phenomena. It is not the case that longer term Treasuries or Agency securities move more in yield than shorter term securities. Table 6   Window (-1,0)    Change in Treasury Yield (bps) Agency Yield (bps) Agency MBS Yield (bps) Term-to-Maturity Term-to-Maturity Term-to-Maturity Announcement Date 30 Year 10 Year 5 Year 1 Year 10 Year 5 Year 10 Year 5 Year 08/10/2010 -1 -7 -8 -1 -7 -9 1 -5 09/21/2010 -8 -11 -9 0 -11 -9 -7 1 11/30/2010 16 4 -4 0 5 -5 -5 -2 Change in yield on fixed income securities with a (0,1) window; Source: Bloomberg For example, from table 6 we see that on the first event day, the treasury yield dropped more for the longer-term bonds. We also see that on the third event date, the treasury yield on 10-yr and 30-yr bonds rather increased. There does not appear to be an existence of liquidity premium hypothesis. Treasury and Agency yields fall by nearly the same amounts, and hence the spread also remained flat. Hence, the liquidity premium also remains unchanged. Table 7   Ãƒâ€šÃ‚  Window (-1,0) Change in Inflation Swap (bps) SP 500 Price Index    Term-to-Maturity Announcement Date 30 Year 10 Year 5 Year 1 Year Change in basis points 08/10/2010 5 -1 -3 0 72 09/21/2010 6 6 6 -1 26 11/30/2010 6 -3 2 1 37 Change in Inflation swap rate and SP 500; Source: Bloomberg From table 7, we see that the inflation expectations rise by 1 to 6 basis points and the impact was smaller as compared to QE1. It is noteworthy that the inflation expectation on 30-yr maturity is in line with the inflation expectation in post-QE1 period. Table 8   Ãƒâ€šÃ‚  Window (-1,0) VIX Price Index USD-EUR Exchange Rate Gold Spot Price BBB Mid-Yield Spread (5 Year) Announcement Date (Change in bps) (Change in bps) (Change in bps) (Change in bps) 08/10/2010 100 -8 -87 -4 09/21/2010 400 -153 -33 -8 11/30/2010 -930 -74 -41 -3 Change in VIX, USD-EUR, Gold and BBB spread; Source: Bloomberg In line with QE1, the movements in stock and commodity prices remain ambiguous. However, the currency movement was distinct as the exchange rate fell on each QE2 event dates and the magnitude of the change was larger on QE2 event dates. From table 8, we see that, the generic yield spread on BBB graded bonds narrowed by few basis points. The effect is smaller than QE1 as expected. Gold price also fell on each event day of QE2. However, we have seen substantial growth in gold price since the initiation of QE2 to date. Table 9 Window (-1,+1) Treasury Yield (5 Yr) BBB Spread (5 Yr) SP 500 Gold Spot Price 08/10/2010 -9 -15 -3.4% 0.2% 09/21/2010 -9 -10 -0.7% -1% 11/30/2010 13 4 1.5% -2% Change in 5-Yr treasury yield, BBB spread, SP 500 and Gold Price; Source: Bloomberg Table 10 Window (-3,+3) Treasury Yield (5 Yr) BBB Spread (5 Yr) SP 500 Gold Spot Price 08/10/2010 -11 -18 -4.1% 1.8% 09/21/2010 -11 -12 2.1% 1.9% 11/30/2010 5 8 2.2% 2% Change in 5-Yr treasury yield, BBB spread, SP 500 and Gold Price; Source: Bloomberg We observe similar movements in treasuries and other asset prices for QE2 when we use 3- and 7-day window event (see table 9 and 10). However, the magnitude of the change is lesser than that of QE1. This is quite plausible as QE2 was well expected before the QE2 announcement day. 5. Stochastic Interest Forecasting Models 5.1 Theoretical Background of Vasicek and CIR Model I use interest rate models, those of Vasicek (1977) and of Cox, Ingersoll and Ross (CIR; Cox et al., 1985). Both models assume that the risk-neutral process for the (instantaneous) short rate r is stochastic, with one source of uncertainty. The stochastic process includes drift and volatility parameters which depend only on the short rate r, and not on time. The short rate model involves a number of variables, and different parameter choices for these variables will lead to different shapes for the term structure generated from the model. Both interest rate models feature so-called mean reversion of the short rate, that is, a tendency for the short rate to drift back to some underlying rate. This is an observed feature of the way interest rates appear to vary. The two models differ in the handling of volatility. I start with Vasicek model, and then consider the CIR model. (i) The Vasicek Model Vasicek model (1977) assumes that the instantaneous interest rate at time t, r(t), follows the mean-reverting process of the following form: (1) Thus a small change (dr) in the short rate in time increment (dt) includes a drift back to mean level at a rate for the short rate. The second volatility term involves uncertainty, dz representing a normally distributed variate with zero mean and variance dt. The short rate r (strictly r(t)) is assumed to be the instantaneous rate at time t appropriate for continuous compounding. I assume that short rate is to be the instantaneous at time t. Parameter exhibits a mean-reverting feature in the Vasicek model which represents equilibrium level of the short-term interest rate, around which it stochastically evolves. When the interest rate falls below (above) its equilibrium level, the instantaneous change in interest rate is positive (negative). The short-term interest rate will move toward its long-term value at a greater speed when it is far from it and when the parameter value (speed of adjustment) is high. I assume that the volatility of the short rate is assumed normally distributed. In the one-factor model, security values are determined by the zero-rate. Bond price in a risk-neutral economy discounted at time t with a maturity of can be represented as follows: (2) Given expectation with respect to stochastic process, the spot rate can be estimated as follows: (3) Using the expected yield, bond value can be found by the following way: (4) The yield to maturity of a bond is defined as , which implies: (5) As the maturity increases from , the yield to maturity converges to: (6) Vasicek model assumes that the stochastic movement of the zero rate is independent of the level of the zero rate. However, this is not true at a zero-rate environment or at an extreme levels of the zero rate. During high inflation period, the short-term interest rates are very unstable and, as a result, the volatility of the short rate tends to be high. When the short-term rate is very low, its volatility is limited by the fact that interest rates cannot decline much as it approaches zero. In our model simulation, I notice that when the zero-rate approaches to zero, Vasicek model forecast negative interest rate which is not possible in realty. To tackle this problem I use CIR model imposing the non-negativity constraint on its stochastic evolution. (ii) The CIR Model The CIR model overcomes the negative interest rate issue that I have in Vasicek model. In this framework, the risk-neutral dynamics of the short rate is described by the equation: (7) is the mean reversion parameter, is the mean level, is the proportion of the square root of the level of interest rate and follows a standard Brownian motion. This framework has the same mean reverting drift as the Vasicek model, but the volatility of change in the zero rate in a short period of time is proportional to the square root of the interest rate. It implies that, as the short-term interest rate increases, its standard volatility increases. Under the CIR (1985) model, P(r, t) at time t for all interest rate satisfies the following bond valuation approach: (8) and the conditional variance is given by (9) With the boundary condition that (10) Given the relevant expectation, I can obtain the bond price as follows: , (11) where (12) and A zero-bond is usually expressed in terms of its yield rather than its price. The yield to maturity on a period zero-coupon bond, can be estimated from equation (9) as follows: (13) The CIR and Vasicek models are single factor equilibrium models of the instantaneous interest rate movement providing equilibrium asset prices and free of arbitrage opportunities. Specially, the CIR model performs better under a zero-rate environment as it imposes the non-negativity constraint on the term structure model. It is interesting to find out which is a better model in estimating market price. 5.2 Term Structure Forecasting The simulation of the short rate is based on the stochastic model as described in the last section. I run the simulation using the parameters estimated from the first order autoregressive model using the historical time-series daily data on short rate from 2006-2007. We have to remember that the short-rate is explicitly a function of federal fund or over-night target rate. Hence, the model does not give us the flexibility to go beyond two years as the volatility of the key policy rate will get larger. From 2006 to 2007, federal fund rate moved by only 1% and that gives us the rationale for using two years of data points. Table 11 shows the zero-rate on the event dates used in this paper. Table 11 Announcement Date Short-Rate 11/25/2008 1 bp 12/01/2008 7 bps 12/16/2008 4 bps 08/10/2010 15 bps 09/21/2010 17 bps 11/03/2010 13 bps Figure 1: Zero- rate movements since the commencement of QE The starting point of the simulation process is the zero-rate at January 2008 using the parameters estimated from AR (1) model. I find an average of the simulated (model generated short-rates) short-rates for June 2008 approximately 2.08%, from which the entire term structure can be deduced. In table 12, I represented the parameters used to calibrate the stochastic models. Table 12 Estimated Parameter for Calibration Rate Rate at t=0 1.96% Drift Factor 0.03% Equilibrium Rate 0.98% Volatility 0.73% The term structure shows a downward sloping average fitted yield curve. The simulated yield curve assumes a variety of shapes through time and downward sloping, hump shaped, and inverted hump shaped. In the term structure below, I represent the model predicted short-rates at different maturity. In the simulated short-rate interest rate curve, I represent the predicted short-rates at different point in time. On the vertical axis I have the simulated short-rates and on the horizontal axis I show year as a unit of time. In the term structure, I see that the short-rates approach to the equilibrium long-rate (derived from the historical rate). However, the Vasicek model predicts a negative long-rate. I have already discussed this problem in the previous section and this is why I deploy the CIR model to have the non-negativity constraint. Figure 2: Term Structure of zero-rate As mentioned before, I use three announcement dates for each phase of quantitative easing to testify the stability of our stochastic models. I observe that on the announcement dates, the short-rate ranges between 1 basis point to 17 basis points. Based on our simulated models, the predicted short-rate for June 2008 (month-end) lies in the vicinity of 2%, while the actual rate stood at 1.9%. However, our calibrated model predicts that the interest rate for December 2008 (month-end) would lie somewhere around 2.8% but as we know, since the first announcement date, the interest rate never rose above 32 basis points. Hence, clearly the model fails completely to forecast the future short-rate for any time period after the initiation of the quantitative easing. We have to keep this in mind that in order to make the QE program successful, the Federal Reserve kept its fed fund rate as low as 25 basis points which in turn governed all other rates in the economy as well which I have already do cumented in our event study approach. If I impose the current policy rate to be the starting point of the simulation, the model indeed diverges to zero-rate and takes the following form: Figure 3: Simulation of zero-rate movements using current (25 bps) overnight rate as the starting point In figure 3, I see that for June-2008 (as the initial point of the simulation is jan-2008), the simulated zero-rate is approximately zero percent. However, due the lack of non-negativity constraint in the Vasicek model, the rates become negative for a period of time. The CIR model however keeps the short-rate zero bound because of the non-negativity constraint. The day before the initial QE announcement date, the zero-rate stood at 13 bps and based on that, the trajectory looks like the following: Figure 4: Simulation of zero-rate movements using the day before the first QE announcement day as the starting point In figure 4, I see that the Vasicek model again predicted short-rates approaching towards the negative quadrant which is not possible. However, due to the non-negativity constraint, CIR model allows us to forecast quite accurately by keeping the short-rate horizontal asymptote bound. From our models, it is evident that, the models could indeed predict the impact of QE for the post-QE period when the initial starting point of the simulation is anytime in the vicinity of September 2008. In that time period the market agents were aware that the Federal Reserve was going to implement the QE1. However, it was not possible to predict the zero-rates accurately a year ahead or even six months prior to the initial announcement date. Looking at specific dates, it turns out that inverse humped and upward sloping shapes occur as well. All yields with their respective maturity times are a function of the short rate. Hence, the variance of a yield with an arbitrary maturity time strongly depends on the variance of the simulated short rate. Some of the simulated results have been presented below (see panel a-d). (a) (b) (c) (d) Panel a-d represent the simulation of the zero-rate movements using January 2008 as a starting point. Using the stochastic volatility parameter and long run equilibrium interest rate, I simulate the model assuming a standard Brownian motion. From the simulations, I see that the short-rate for June-2008, the rate ranges from 1.2% to 2.5% as mentioned before; the average of the simulated short-rates was 2.08%, while the actual rate stood at 1.9%. However, no simulation result approaches anywhere close to 32 basis points which was the highest short-rate I have noticed since the initial announcement date of the quantitative easing. This depicts the instability of the forecasting model for the post-QE period and the results remain the same for both QE1 and QE2 as the simulated rates never approach zero as far as one year time frame is concerned starting form January 2008. 6. Conclusion I document that QE1 and QE2 substantially lower interest rates on treasuries, highly-rated corporate bonds and agency securities across different maturity schedule. The impact of quantitative easing on Agency backed mortgage rates is large when fed purchases MBS along with treasuries (QE1), but not when it only purchases treasuries (QE2). From the movement of inflation swap rates, we see that the expected inflation increased significantly during the first phase of asset purchase program (QE1) and modestly during the second phase. I also see that US currency exchange rate fell both on QE1 and QE2 event dates and the effect was larger for QE2 events. Stock and future prices did not react immediately to the announcement dates. However, I document that the market agents did revise their expectation for the longer term. From our stochastic model, I observe that market models could predict the interest rate movements for the pre-QE period but the model failed to predict the interest rate m ovements in the post-QE period. This result signifies the significant interest rate movements as a result of QE. Feds QE program has successfully affected the interest rates and other asset prices. However, we have to wait for years before we know whether QE successfully triggered the wealth effect among the market agents. Bibliography Baumeister, C., and Benati, L. (2010). Unconventional monetary policy and the great recession estimating the impact of a compression in the yield spread at the zero loIr bound. 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