Central Bank-Driven Mispricing

75 Pages Posted: 27 Aug 2018 Last revised: 24 Mar 2020

See all articles by Loriana Pelizzon

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration; Leibniz Institute for Financial Research SAFE; Ca Foscari University of Venice

Marti G. Subrahmanyam

New York University (NYU) - Department of Finance

Davide Tomio

Darden School of Business

Jun Uno

Waseda University

Date Written: March 2020

Abstract

We show that the European Central Bank’s bond purchases, undertaken in the context of Quantitative Easing, caused significant mispricing between German and Italian government bonds and their respective futures contracts. We document three channels through which the central bank’s bond purchases led to this mispricing: the deterioration of bond market liquidity, the increased bond “specialness” on the repurchase agreement market, and the higher cost of carry. The mispricing we document is the result of two contemporaneous forces: the increased in trading frictions caused by Quantitative Easing, and regulatory capital constraints that imply non-negative required returns on riskless trades.

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 (March 2020). 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

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 ( email )

Dorsoduro 3246
Venice, Veneto 30123
Italy

Marti G. Subrahmanyam

New York University (NYU) - Department of Finance ( 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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