Quantitative Easing in the Euro Area - An Event Study Approach

40 Pages Posted: 1 Dec 2017

See all articles by Florian Urbschat

Florian Urbschat

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics

Sebastian Watzka

Ludwig Maximilian University of Munich (LMU)

Date Written: October 26, 2017

Abstract

We examine the effects of the Asset Purchase Programme (APP) gradually introduced by the European Central Bank from September 2014 onwards. Studying the short-term reaction of financial markets after APP press releases, we analyse the development of bond yields and spreads around these releases. More precisely, we try to estimate different asset price channels by quantifying the cumulative decrease of spreads and by running event regressions for several Euro Area countries. Focusing on the signalling channel, measured by the OIS rate, and the portfolio rebalancing channel, proxied by the conditional bond-OIS spread, we find that the effects in yield and spread reduction were most pronounced for the initial announcement on the Public Sector Purchase Programme (PSPP) but declined afterwards for additional announcements. Possible explanations for this are the declining degree to which the ECB surprised markets and the increasingly burdensome institutional set-up of the APP. While yield reductions were larger for periphery countries’ than for core countries’ bonds, our evidence suggests that this stronger reduction is mostly due to a decreasing risk component of southern bonds. In fact, once controlling for this implicit credit risk reduction we find rather mild effects from portfolio rebalancing for all countries.

Keywords: large scale asset purchase, yield curve, quantitative easing, APP, event study

JEL Classification: E430, E440, E520, E580, G140

Suggested Citation

Urbschat, Florian and Watzka, Sebastian, Quantitative Easing in the Euro Area - An Event Study Approach (October 26, 2017). CESifo Working Paper Series No. 6709, Available at SSRN: https://ssrn.com/abstract=3079476 or http://dx.doi.org/10.2139/ssrn.3079476

Florian Urbschat (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics ( email )

Ludwigstrasse 28
Munich, D-80539
Germany

Sebastian Watzka

Ludwig Maximilian University of Munich (LMU) ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

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