Central Bank-Driven Mispricing

80 Pages Posted: 27 Aug 2018 Last revised: 10 Jul 2022

See all articles by Loriana Pelizzon

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration

Marti G. Subrahmanyam

New York University (NYU) - Leonard N. Stern School of Business

Davide Tomio

Darden School of Business

Date Written: July 8, 2022

Abstract

We explore whether Quantitative Easing negatively affected the functioning of the market for treasuries. Focusing on the arbitrage between European sovereign bonds and their futures, we show that the scarcity of treasuries created by Quantitative Easing 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 alternatives, 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

Pelizzon, Loriana and Subrahmanyam, Marti G. and Tomio, Davide, Central Bank-Driven Mispricing (July 8, 2022). 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

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

Davide Tomio

Darden School of Business ( email )

100 Darden Boulevard
Charlottesville, VA 22903
United States

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