QE in the euro area: Has the PSPP benefited peripheral bonds?

https://doi.org/10.1016/j.intfin.2021.101350Get rights and content

Abstract

The Public Sector Purchase Programme of the euro area, PSPP, which started in 2015, constitutes an interesting special case of Quantitative Easing (QE) because it involved the purchase of peripheral euro area government bonds, which were clearly not riskless. Moreover, these purchases were undertaken by national central banks at their own risk. Intuition suggests, and a simple model confirms, that, ceteris paribus, large purchases by a central bank of the bonds of its own sovereign could increase the risk for the remaining private bond holders – if this purchase occurs within a monetary union where the national central banks have no autonomy left. Our empirical analysis suggests that risk premiums on peripheral bonds did not follow a random walk, contrary to what is assumed in event studies, implying that the announcement effects might not have been permanent. We find that the announcements of bond buying (and its implementation) did not change the stochastics of these premiums and had a smaller impact on CDS spreads which provide another measure of risk.

Section snippets

Introduction and motivation

Over the last decade, many central banks embarked on large-scale asset purchases in the desire to provide further stimulus while their policy rates were already at the lower bound (Wright, 2012, Swanson, 2017, Swanson and Williams, 2014). The Federal Reserve was the first to engage in large-scale purchases of public debt securities, amounting in the end to over 20% of GDP. However, it started to do so in 2008/9, when market volatility was close to a peak (Williamson, 2017, Belke et al., 2017).

Data and variables

We tested the EMH on the 10 yr government bond yields and the corresponding spread (=difference relative to German yields) for Spain, France, Greece, Ireland, Italy and Portugal. Our sample period ranges from 2 September 2013 to 15 January 2018 (over one thousand days). The data source is Datastream. We concentrate on the 10-year maturity because this has been the focus of the literature (Altavilla et al. 2015). Further below we also consider 5-year yields.

The descriptive statistics are shown

Unit root tests

In Table 2 we present the results of Augmented Dickey Fuller (ADF) tests.

We find that the random walk hypothesis is rejected for many variables, especially Spanish, Irish and Italian yields and, even more significantly, Spanish, Irish and Italian spreads over German bonds.

A similar result is obtained when one estimates an autoregressive equation for the first differences in the different yields (and the spreads). Table 3 shows the empirical realisations of autoregressive coefficients in

CDS versus bond spreads: An analysis of the CDS-bond basis

CDS prices and bond spreads provide in principle the same indicator of (default) risk and should be related by the non-arbitrage conditions. However, since the start of the financial crisis CDS spreads and bond spreads have at time diverged considerably.

Fontana and Scheicher (2016) document this phenomenon for the euro area sovereign bond market. Their study shows that, after the start of crisis, the peripheral sovereign debt markets usually showed a substantial persistent negative basis,

Concluding remarks

We start from the observation that QE in the euro area was special because most of the sovereign bond purchases under the PSPP were undertaken by NCBs on their own account. Previous empirical studies of the PSPP have usually neglected this institutional fact, which is key to understanding the behaviour of risk spreads.

Event studies suggest that the announcement of the sovereign bond purchasing programme in the euro area had a strong negative impact on risks spreads for peripheral government

References (44)

  • Belke, A., Gros, D., 2018. Event Studies and the Random Walk Hypothesis: Why the End of Bond Buying by the ECB Is a...
  • S. Boubaker et al.

    Reaching for yield and the diabolic loop in a monetary union

    J. Int. Money Finance

    (2020)
  • Borio, C., Zabai, A., 2016. Unconventional Monetary Policies: A Re-appraisal, BIS Working Papers, No 570, Bank for...
  • Bowsher, C.G., Meeks, R., 2008. Stationarity and the Term Structure of Interest Rates: A Characterisation of Stationary...
  • Camba-Méndez, G., Serwa, D., 2014. Market Perception of Sovereign Credit Risk in the Euro Area During the Financial...
  • Cimadomo, J., Claeys, P., Poplawski-Ribeiro, M. (2016): How Do Experts Forecast Sovereign Spreads? IMF Working Paper,...
  • J. Clouse et al.

    Monetary policy when the nominal short-term interest rate is zero. The B.E

    J. Macroecon.

    (2003)
  • B.H. Cohen et al.

    Term Premia: Models and Some Stylised Facts

    (2018)
  • Dell’Ariccia, G., Rabanal, P., Sandri, D., 2018: Unconventional Monetary Policies in the Euro Area, Japan, and the...
  • Eggertsson, G., Woodford, M. (2003). The Zero Bound on Interest Rates and Optimal Monetary Policy. BPEA, No. 1:...
  • ECB. 2020....
  • European Commission (2012): Regulation (EU) No 236/2012 of the European Parliament and of the Council of 14 March 2012...

    • Cited by (0)

    †

    Professor, University of Duisburg-Essen, Essen, Germany, Associate Senior Research Fellow at CEPS, Brussels, and Senior Research Fellow at King’s College, London.

    View full text
    © 2021 Elsevier B.V. All rights reserved.