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

See all articles by Michiel De Pooter

Michiel De Pooter

Amazon Web Services, Inc.

Robert F. Martin

Federal Reserve Board - International Finance Division

Seth Pruitt

Arizona State University (ASU) - Finance Department

Date Written: May 1, 2016

Abstract

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

De Pooter, Michiel and Martin, Robert F. and Pruitt, Seth, The Liquidity Effects of Official Bond Market Intervention (May 1, 2016). FRB International Finance Discussion Paper No. 1138, Available at SSRN: https://ssrn.com/abstract=2143326 or http://dx.doi.org/10.2139/ssrn.2143326

Michiel De Pooter

Amazon Web Services, Inc. ( email )

410 Terry Avenue North
Seattle, WA 98109-5210
United States

Robert F. Martin

Federal Reserve Board - International Finance Division ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-872-7564 (Phone)
202-736-5638 (Fax)

HOME PAGE: http://www.rfmartin.com

Seth Pruitt (Contact Author)

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

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