Download This PaperCorporate Bond Market Reactions to Quantitative Easing During the COVID-19 Pandemic
54 Pages Posted: 21 Apr 2020 Last revised: 18 Apr 2021
Date Written: April 18, 2021
Abstract
Using transaction data from the first half of 2020, we examine the reaction of corporate credit spreads to the Federal Reserve's monetary policy announcements. We find evidence that the bond markets are segmented across credit ratings, which led to different initial reactions across bonds with different credit ratings but spread across various sectors of corporate bonds over the longer event window. To quantify the default risk channel of quantitative easing, we apply the variance decomposition approach to credit spreads and find that a significant fraction of credit spread changes indeed corresponds to reduced default risk caused by the corporate bond purchase program. In contrast, we only find mixed evidence for the liquidity channel driving the market reaction.
Keywords: Event Study, Corporate Bond, Federal Reserve, Quantitative Easing, COVID-19 Pandemic
JEL Classification: G12, G13
Suggested Citation: Suggested Citation