Download This PaperCentral Bank-Driven Mispricing
80 Pages Posted: 27 Aug 2018 Last revised: 10 Jul 2022
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: Suggested Citation
Leibniz Institute for Financial Research SAFE ( email )
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Frankfurt am Main, 60323
Germany
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Ca Foscari University of Venice - Dipartimento di Economia ( email )
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Venice, 30121
Italy
Marti G. Subrahmanyam
New York University (NYU) - Leonard N. Stern School of Business ( email )
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New York, NY NY 10012
United States