Corporate Bond Market Reactions to Quantitative Easing During the COVID-19 Pandemic
48 Pages Posted: 21 Apr 2020 Last revised: 12 Aug 2020
Date Written: August 12, 2020
Using transaction data from the first half of 2020, we examine the reaction of corporate credit spreads to the Federal Reserve's monetary policy announcements. We find evidence that the bond markets are segmented across credit ratings, which led to different initial reactions across bonds with different credit ratings. The role of market segmentation, however, is temporary, and the effect of reduced default risk spread across different sectors of corporate bonds over the longer event window. To quantify the default risk channel of quantitative easing, we apply the variance decomposition approach to credit spreads and find that a significant fraction of credit spread changes indeed correspond to reduced default risk caused by the corporate bond purchase program. In contrast, we only find mixed evidence for the liquidity channel driving the market reaction.
Keywords: Coronavirus, Event Study, Corporate Bond, Federal Reserve, Quantitative Easing, COVID-19 Pandemic
JEL Classification: G12, G13
Suggested Citation: Suggested Citation