The Liquidity Effects of Official Bond Market Intervention
FRB International Finance Discussion Paper No. 1138
51 Pages Posted: 8 Sep 2012 Last revised: 6 May 2016
Date Written: May 1, 2016
To "ensure depth and liquidity," the European Central Bank intervened in sovereign debt markets through its Securities Markets Programme (SMP), providing a unique opportunity to estimate the effects of large-scale asset purchases on sovereign bond liquidity premia. From reduced-form estimates, we find robust, economically significant impact and lasting reductions in sovereign bonds' liquidity premia in response to official purchases. We develop a search-based asset-pricing model to understand our empirical results. The theory implies that bond liquidity premia fall in response to both official purchases and rising sovereign default probabilities, as seen in the data.
Keywords: Securities Markets Programme, European Central Bank, bond, liquidity risk, search and matching
JEL Classification: D83, E43, E58, G12
Suggested Citation: Suggested Citation