Central Bank-Driven Mispricing

61 Pages Posted: 27 Aug 2018 Last revised: 29 Oct 2018

See all articles by Loriana Pelizzon

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration; Goethe University Frankfurt - Research Center SAFE; Ca Foscari University of Venice

Marti G. Subrahmanyam

New York University - Stern School of Business

Davide Tomio

Darden School of Business

Jun Uno

Waseda University

Date Written: August 1, 2018

Abstract

We show that bond purchases undertaken in the context of quantitative easing efforts by the European Central Bank created a large mispricing between the market for German and Italian government bonds and their respective futures contracts. On top of the direct effect the buying pressure exerted on bond prices, we show three indirect effects through which the scarcity of bonds, resulting from the asset purchases, drove a wedge between the futures contracts and the underlying bonds: the deterioration of bond market liquidity, the increased bond specialness on the repurchase agreement market, and the greater uncertainty about bond availability as collateral.

Keywords: Central Bank Interventions, Liquidity, Sovereign Bonds, Futures Contracts, Arbitrage

JEL Classification: G01, G12, G14

Suggested Citation

Pelizzon, Loriana and Subrahmanyam, Marti G. and Tomio, Davide and Uno, Jun, Central Bank-Driven Mispricing (August 1, 2018). SAFE Working Paper No. 226. Available at SSRN: https://ssrn.com/abstract=3239407 or http://dx.doi.org/10.2139/ssrn.3239407

Loriana Pelizzon (Contact Author)

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, D-60323
Germany

Goethe University Frankfurt - Research Center SAFE ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

HOME PAGE: http://www.safe-frankfurt.de

Ca Foscari University of Venice ( email )

Dorsoduro 3246
Venice, Veneto 30123
Italy

Marti G. Subrahmanyam

New York University - Stern School of Business ( email )

Stern School of Business,
44 West 4th Street, Suite 9-68
New York, NY 10012-1126
United States
212-998-0348 (Phone)
212-995-4233 (Fax)

Davide Tomio

Darden School of Business ( email )

100 Darden Boulevard
Charlottesville, VA 22903
United States

Jun Uno

Waseda University ( email )

1-6-1 Nishi-Waseda
Shinjuku-ku
Tokyo, 1698050
Japan

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