Download This PaperCentral Bank-Driven Mispricing
94 Pages Posted: 27 Aug 2018 Last revised: 14 Nov 2023
Date Written: September 24, 2023
Abstract
We explore whether Quantitative Easing (QE) negatively affected the functioning of the treasury market. Focusing on the arbitrage between European sovereign bonds and their futures contracts, we show that the scarcity of treasuries created by QE led to a disconnect between the prices of identical assets. We identify three channels: reduced bond market liquidity, increased funding costs in the repo market, and a higher cost of carry. A change in a policy instrument allows us to identify scarcity as the main driver and rule out alterna-tives, such as balance sheet costs. Our results extend to other arbitrage relations involving treasuries.
Keywords: Central Bank Interventions, Liquidity, Sovereign Bonds, Futures Contracts, Arbitrage
JEL Classification: G01, G12, G14
Suggested Citation: Suggested Citation
Leibniz Institute for Financial Research SAFE ( email )
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
HOME PAGE: http://www.safe-frankfurt.de
Ca Foscari University of Venice - Dipartimento di Economia ( email )
Cannaregio 873
Venice, 30121
Italy
Marti G. Subrahmanyam
New York University (NYU) - Leonard N. Stern School of Business ( email )
44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States