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We explore the transmission of the ECB’s public sector asset purchase programme (PSPP) via the portfolio rebalancing of investment funds and their investors. Evidence for this channel would validate several theoretical propositions and may help in fine tuning the programme. Using dynamic panel methods to identify significant rebalancing, we find that PSPP-holding funds reduce their holdings of government bonds and rebalance towards bonds issued by deposit taking corporations - but only after the scaling-up of purchases in March 2016. Deeper analysis shows that the purchased assets are predominantly issued outside the euro area. Non-PSPP-holding funds also tend to rebalance towards non-EA issued government bonds and those issued by non-financial corporations. We find no evidence of rebalancing towards equities or derivatives. Investment flows are found to be a catalyst for the rebalancing undertaken by funds themselves. Funds with significant redemptions do relatively more rebalancing of their portfolios. Overall, our results suggest that the programme currently operates through purchases of foreign assets. The scaling-up of the operation is closely aligned with the statistical significance of its effects.

The Portfolio Rebalancing Effects of the ECB's Asset Purchase Programme