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Flow Effects of Central Bank Asset Purchases on Sovereign Bond Prices: Evidence from a Natural Experiment
Author(s) -
DE SANTIS ROBERTO A.,
HOLMHADULLA FÉDÉRIC
Publication year - 2020
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12665
Subject(s) - bond , maturity (psychological) , monetary economics , market liquidity , economics , yield (engineering) , natural experiment , simultaneity , asset (computer security) , monetary policy , business , finance , psychology , developmental psychology , statistics , materials science , physics , mathematics , computer security , classical mechanics , computer science , metallurgy
Abstract We estimate the response of sovereign bond prices to net supply shocks caused by purchase operations under the ECB's Public Sector Purchase Programme (PSPP). To avoid simultaneity bias in the estimated relationship between prices and purchases, we exploit a PSPP feature that renders securities temporarily ineligible for reasons unrelated to their prices. Using these purchase restrictions as an instrument to identify exogenous variation in purchase volumes, we find that PSPP causes statistically significant and economically relevant upward price impacts. The impacts are short‐lived and concentrated in securities issued by higher yield jurisdictions and characterized by higher maturity and lower liquidity.