Unconventional Monetary Policy and Risk-Taking: Evidence from Agency Mortgage REITs

W. Scott Frame and Eva Steiner
Working Paper 2018-8
August 2018

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We study how the Federal Reserve's quantitative easing (QE) influenced the behavior of Agency mortgage real estate investment trusts (REITs)—a set of institutions identified by the Financial Stability Oversight Council as posing systemic risk. We document that Agency mortgage REITs: [i] equity prices reacted to QE announcements and in a manner consistent with their business prospects; [ii] grew markedly during QE2 and receded during QE3 in relation to the Federal Reserve's Agency MBS purchase activity; and [iii] increased their leverage during QE3. Our findings are consistent with unconventional monetary policy actions crowding out private investment and "reaching for yield" behavior by financial institutions.

JEL classification: E58, G21, G23, G28

Key words: quantitative easing, risk-taking, REITs, GSEs, mortgages, securitization


This paper has benefited from comments by Jose Berrospide, Yongheng Deng, Aurel Hizmo, Arito Ono, Rodney Ramcharan, Philip Swagel, Joe Tracy, John Worth, and seminar participants at the Federal Reserve Board, Louisiana State Uuniversity, the 2018 Midwest Finance Association Meeting, the 2018 ASSA annual meeting, the 2017 ARUEA national conference, and the 2017 "Unconventional Monetary Policy: Lessons Learned" conference held at the Hong Kong Monetary Authority. The authors thank Abhijeet Bhalkikar, Manny Dong, and Pam Frisbee for outstanding research assistance and Ellen Correia Golay and Brett Rose for providing the Federal Reserve data on purchases and holdings of U.S. Treasuries and Agency MBS. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
Please address questions regarding content to W. Scott Frame, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309-4470, 404-498-8783, scott.frame@atl.frb.org, or Eva Steiner, Cornell SC Johnson College of Business, 465B Statler Hall, Ithaca, NY 14853, 607-255-6697, ems457@cornell.edu.
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