Was the ECB’s PEPP Project Effective in Ending the COVID-Induced Crisis in the Bond Market?

42 Pages Posted: 27 Sep 2022 Last revised: 21 Mar 2023

See all articles by Lior Cohen

Lior Cohen

University of Barcelona

Itai Furman

Tel Aviv University

Date Written: March 9, 2023

Abstract

This paper examines the financial crisis in the European corporate bond market due to the COVID-19 pandemic in 2020 and the effectiveness of the European Central Bank's (ECB) QE program, PEPP, in mitigating it. Using credit (Z-spread) and liquidity risk (scaled bid-ask spread) measurements, we find that the crisis raised Z-spreads for eligible and ineligible bonds. Additionally, the bid-ask spread of ineligible bonds increased by 16 basis points (bp) or 22.9%. However, the spread of eligible bonds remained stable, indicating that QE (initiated before the pandemic) shored up liquidity for eligible corporate bonds. Among ineligible bonds, those issued by firms in covid hard-hit industries experienced a steeper increase in credit and liquidity spreads than other firms. Finally, while PEPP did not improve liquidity conditions, it effectively decreased the credit risk of ineligible bonds, especially in covid-sensitive industries.

Keywords: COVID-19, QE, liquidity crunch, Financial Crisis, PEPP

Suggested Citation

Cohen, Lior and Furman, Itai, Was the ECB’s PEPP Project Effective in Ending the COVID-Induced Crisis in the Bond Market? (March 9, 2023). Available at SSRN: https://ssrn.com/abstract=4229743

Lior Cohen (Contact Author)

University of Barcelona ( email )

Gran Via de les Corts Catalanes, 585
Barcelona, 08007
Spain

Itai Furman

Tel Aviv University ( email )

Ramat Aviv
Tel-Aviv, 6997801
Israel

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