Portfolio rebalancing and the transmission of large-scale asset purchase programs: Evidence from the Euro area

doi:10.1016/j.jfi.2020.100896

Journal of Financial Intermediation

Volume 48, October 2021, 100896

https://doi.org/10.1016/j.jfi.2020.100896 Get rights and content

Abstract

The European Central Bank's large-scale asset purchase program targeted safe assets, but also aimed to impact prices of risky assets. The mechanism for this is the “portfolio rebalancing channel”, where financial institutions’ portfolio decisions impact financial prices more broadly. We examine this mechanism using cross-sectional heterogeneity in how the financial portfolios of different sectors of the European economy were affected around the purchase program. We find evidence of rebalancing. In vulnerable countries, where macroeconomic unbalances and relatively high risk premia remained, we document rebalancing towards riskier securities. In less vulnerable countries, based on granular information for large European banks, we document rebalancing toward bank loans.

Section snippets

The data and descriptive evidence

The main source of information used is the security holding statistics (SHS) dataset, which is compiled by the Eurosystem and contains confidential granular information, at individual ISIN level, on securities held by each institutional sector in each euro area country. The coverage is close to 90 per cent of the universe of debt securities reported in the national accounts. SHS also includes information on the portfolio of securities held by each of the 25 largest euro area banks. This dataset

The empirical framework

The objective of this section is to explore the role played by monetary policy in shaping the risk appetite of euro area investors. The approach consists in the estimation of a regression equation with the following baseline specification: $\begin{matrix} h_{i, h, t} = (β_{0} m_{h} + {β^{'}}_{0} r_{i t} + {β_{0}}^{^{″}} m_{h} r_{i, t}) + (β_{1} m_{h} T_{t} + {β_{1}}^{^{'}} T_{t} r_{i, t} + β_{1}^{^{″}} m_{h} T_{t} r_{i, t}) + \\ + γ T_{t} + a_{i, t} + b_{h, t} + ε_{i, h, t} \end{matrix}$

The variable $h_{i, h, t}$ is the (log) holding amount of a security with ISIN i held by sector h (e.g. French investment funds), in the two periods considered (t is either 2014 Q1 or

Conclusions and policy implications

In this paper we study whether the ECB's 2015 QE program, the APP, induced portfolio-rebalancing, a channel of transmission that has attracted much attention in the policy discussion, but for which there is limited evidence.

The functioning of the portfolio rebalancing channel is particularly relevant in bank-based economies – such as the euro area – as it is the channel of transmission through which purchase programs are meant to benefit sectors such as SMEs. Unlike issuers of securities, which

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We analyse the effects of the Pandemic Emergency Purchase Programme (PEPP) launched by the ECB after the burst of the Covid-19 pandemic. The effects of the programme were different from the previous asset purchases. The PEPP significantly reduced the yield on bonds that at the same time were eligible to the programme and showed a green label. Via a triple difference estimator, we show that this effect is additional to the outperformance of greens vs non-green bonds that also occurred in the set of non-eligible bonds. All in all, the estimated impact stands at 51 basis points, a value that is significant also from an economic point of view: around 20 per cent of the cost of issuing a bond. From a climate change perspective, this evidence suggests that asset purchase programmes are an effective way of supporting firms financing climate-friendly investments on the bond market. In addition, we find that the issuers that benefitted most from the PEPP improved their ESG performance to a larger extent than other issuers.
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Fratzscher et al. (2016) study the case of Europe and show that UMP policies decrease risk aversion, boost equity prices, while they have a negligible effect on bond markets outside the EU. More recently, Albertazzi et al. (2021) focus precisely on the portfolio rebalancing effect following the introduction of the quantitative easing (QE) programme in Europe. Using a unique database of security holdings by investment funds at the country level, they show that portfolio rebalancing effectively occurs in vulnerable European countries, mostly towards corporate securities.
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Krishnamurthy et al. (2018) consider the effects of the ECB’s Securities Markets Programme (SMP) and Outright Monetary Transactions (OMT). Koijen et al. (2021), Bergant et al. (2018) and Albertazzi et al. (2021) analyze portfolio flows before and during the PSPP period using quarterly transaction-level data. The remainder of this paper is structured as follows.
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Since they involve direct intervention in financial markets, these purchases not only lower the expected return on targeted safe assets, but also fuel a search for yield, pushing investors into other riskier asset classes with a higher expected return. This phenomenon is well described in the academic literature and is known as the portfolio rebalancing channel of QE (see e.g. Albertazzi et al., 2020; Koijen et al., 2017). Although a lower price of risk is one of the intended outcomes of QE, it also increases the probability of overheating and inflating asset price bubbles in riskier assets, i.e. causing asset prices to increase to levels that are out of line with their fundamental value (see e.g. Chen et al., 2016; De Haan and Van den End, 2018).
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¹: The views expressed are our own and do not necessarily reflect those of the Eurosystem. Becker wishes to acknowledge financial support from the ECB, and Jan Wallanders och Tom Hedelius Forskningsstiftelse. This is a revised draft of Albertazzi et al. (2018).

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Portfolio rebalancing and the transmission of large-scale asset purchase programs: Evidence from the Euro area

Abstract

Section snippets

The data and descriptive evidence

The empirical framework

Conclusions and policy implications

J. Financ. Econ.

Portfolio rebalancing and the transmission of large-scale asset programmes: evidence form the euro area

Eur. Cent. Bank Work. Pap.

The effect of unconventional monetary policy on cross-border bank loans: evidence from an emerging market

Eur. Econ. Rev.

Asset purchase programmes and financial markets: lessons from the euro area

Eur. Cent. Bank Work. Pap.

The financial and macroeconomic effects of the OMT announcements

Int. J. Cent. Bank.

The ECB's asset purchase programme: an early assessment

Eur. Cent. Bank Work. Pap.

Reaching for yield in the bond market

J. Finance

Financial repression in the European Sovereign Debt Crisis

Rev. Finance

Small business credit availability and relationship lending: the importance of bank organisational structure

Econ. J.

Distance, lending relationships, and competition

J. Finance

Following the money: evidence for the portfolio balance channel of quantitative easing

Bank Can. Staff Work. Pap.

A capital structure channel of monetary policy

J. Financ. Econ.

Financial intermediation, loanable funds, and the real sector

Quart. J. Econ.