Quantitative Easing and Exuberance in Stock Markets: Evidence from the Euro Area

In response to a prolonged period of low inflation, the European Central Bank (ECB) introduced Quantitative Easing (QE) in an attempt to steer inflation to its target of below, but close to, 2% in the medium term. This paper examines whether QE contributes to exuberance in euro area stock markets by using recent advances in bubble detection techniques (the GSADF-test). We do so by linking price developments in 10 euro area stock markets to a series of country specific macro fundamentals and QE. The results indicate that periods of QE coincide with exuberant investor behaviour, even after controlling for improving macro fundamentals.