Large-scale asset purchases can impact the price of securities either directly, when securities are targeted by the central bank, or indirectly through portfolio rebalancing by private investors. We quantify both the direct impact and that of portfolio rebalancing, emphasising the role of investor heterogeneity. We use proprietary security-level data on asset holdings of different investors. We measure the direct impact at security level, finding that it is smaller for securities predominantly held by more price-elastic investors, i.e. funds and banks. Comparing securities at the 90th and 10th percentile of the investor elasticity distribution, the price impact of central bank purchases on the securities held by more price-elastic investors is only two-thirds as large. To assess the portfolio rebalancing effects, we construct a novel shift-share instrument. With this, we measure investors’ quasi-exogenous exposure to central bank purchases, based on their holdings of eligible securities before the quantitative easing (QE) programme was announced. We show that funds and banks sell eligible securities to the central bank and rebalance their portfolios towards ineligible securities, with those investors more exposed to central bank purchases ex ante engaging in more rebalancing. Using detailed holdings data for mutual funds, we estimate that for each euro of proceeds from selling securities to the central bank, the average fund allocates 88 cents to ineligible assets and 12 cents to other eligible assets that the central bank did not buy in that time period. The price of ineligible securities held by more exposed funds increases compared with those held by less exposed funds, underscoring the fact that the portfolio rebalancing channel is at work.
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