This study quantifies the financial market impact of the ECB’s public and corporate bond purchase programs from January 2015 to June 2016. The conducted event study analyses eleven announcement events and their influence on government bonds, corporate bonds, exchange rates and equity markets. The focus lies on the German market, although all other G7 countries are included for reasons of comparison.
These are the main findings: Government bond and corporate bond yields fell by 23bp and 32bp respectively over all events; the effect on the euro was negative but weak; and the euro equity markets were positively driven by 680bp. Furthermore, most of the effects occur on the day following the events. Finally, the news impact diminishes over time, causing an observable break between the public and corporate bond purchase program.
Table of Contents
1. Introduction
2. Literature review & background
2.1 Channels through which QE influences prices
2.2 Study layouts used in previous work
2.3 Findings of previous research
2.4 Spill-over effect on other assets
2.5 Positioning of this dissertation within the existing work
2.6 Quantitative Easing of the European Central Bank
3. Methodology
4. Data
5. Results
5.1 Government bonds
5.2 Corporate bonds
5.3 Currencies
5.4 Equity markets
6. Conclusion
Objectives & Core Topics
The primary objective of this dissertation is to quantify the impact of the European Central Bank's (ECB) public and corporate bond purchase programs on various financial markets, specifically focusing on the German market while using the G7 countries as a comparative benchmark.
- Analysis of the financial market impact of Quantitative Easing (QE) announcements.
- Evaluation of asset price reactions in government bonds, corporate bonds, currencies, and equity markets.
- Comparison of the Public Sector Purchase Program (PSPP) versus the Corporate Sector Purchase Program (CSPP).
- Examination of the "event study" methodology for measuring financial market efficiency.
- Investigation into transmission channels like liquidity, signaling, and portfolio balance effects.
Excerpt from the Book
Channels through which QE influences prices
So first of all, one has to work out how exactly quantitative easing influences the asset prices. The existing research has identified a number of different so-called transmission channels to classify the effects. Although some authors like Krishnamurthy & Vissing-Jorgensen (2011) decided to break down the effects in many different categories (including a safety channel, inflation channel and MBS risk-premium channel), the majority of research works only with three main channels. Those are the liquidity effect, the signalling effect and the portfolio balance effect (PB).
The first effect is the liquidity effect. The central bank conducting QE buys bonds on the market and puts them on its balance sheet. The bond selling investors are consequently holding more liquidity afterwards and the liquidity premium falls, at least on liquid bonds. The prices of bonds like treasuries partly consist of a liquidity premium, accounting for their high liquidity. This is especially true in times of market distress. When the overall liquidity in the market increases due to asset purchases, the liquidity premium on these bonds falls and this channel consequently implies rising yields (Krishnamurthy & Vissing-Jorgensen, 2011). So, whereas the signalling effect is supposed to lower yields at the announcement, the liquidity effect is said to re-increase them at the time of the actual purchase.
The signalling effect describes the commitment of the central bank to ongoing low interest rates. It is also in the self-interest of the central banks to keep interest low after purchasing assets because they would otherwise suffer from large losses on their balance sheet positions and the state might consequently be obliged to recapitalize the central bank – a prospect which should be avoided by any means (Bauer & Rudebusch, 2014). The sentiment of corporates and consumers will also be invigorated because they are motivated to spend more when the risk of deflation diminishes (Hendrickson & Beckworth, 2013). The whole signalling aspect can also be described as the creation of confidence (Lim, et al., 2014) and a good measure of it can, for example, be the market’s implied volatility.
Summary of Chapters
Introduction: Outlines the necessity of unconventional monetary policy and the research gap concerning the ECB's specific QE programs.
Literature review & background: Provides a theoretical overview of QE objectives and the transmission channels through which central bank interventions affect asset prices.
Methodology: Explains the event study framework used to analyze the eleven identified ECB announcements and the assumptions regarding market efficiency.
Data: Details the dataset, focusing on the German investor perspective and the use of Bloomberg indices for bonds and equity market proxies.
Results: Presents empirical findings on the reaction of government bonds, corporate bonds, currencies, and equities to the APP announcements.
Conclusion: Summarizes the key findings, confirming the significant impact of QE on asset yields and highlighting structural differences between PSPP and CSPP.
Keywords
Quantitative Easing, ECB, Asset Purchase Program, PSPP, CSPP, Event Study, Bond Yields, Signaling Effect, Liquidity Effect, Portfolio Balance, Financial Markets, German Market, G7, Monetary Policy, Market Efficiency
Frequently Asked Questions
What is the primary focus of this dissertation?
The study focuses on quantifying the financial market impact of the ECB's public and corporate bond purchase programs from January 2015 to June 2016.
Which central bank programs are analyzed?
The research examines the Public Sector Purchase Program (PSPP) and the Corporate Sector Purchase Program (CSPP) under the umbrella of the Asset Purchase Program (APP).
What is the core research question?
The study investigates how ECB asset purchase announcements influence asset price movements, specifically looking at bond yields, currencies, and equity markets.
Which methodology is employed to analyze the effects?
An event study approach is used, which measures market responses to major news releases by comparing them to control groups, including G7 economies.
What are the main asset classes covered in the main section?
The analysis covers government bonds, corporate bonds, currencies, and various national equity indices.
What are the characterizing keywords of the research?
Key terms include Quantitative Easing, Asset Purchase Program, Signaling Effect, Liquidity Effect, and Portfolio Balance.
How did the bond markets react to the ECB announcements?
The results show that bond yields generally fell in response to the purchases, with corporate bonds showing even more sensitivity than government bonds.
Is there a difference in impact between the PSPP and the CSPP?
Yes, the study identifies a structural break, noting that early announcements (PSPP) often had a higher impact compared to the later corporate-focused programs.
- Citar trabajo
- Dominic Fänders (Autor), 2016, The effects of the ECB's public and corporate bond purchases. An event study examining the German financial market in comparison to the G7-group, Múnich, GRIN Verlag, https://www.grin.com/document/434665
