Corporate Bond Market Reactions to Quantitative Easing During the COVID-19 Pandemic

48 Pages Posted: 21 Apr 2020 Last revised: 12 Aug 2020

See all articles by Yoshio Nozawa

Yoshio Nozawa

Hong Kong University of Science and Technology

Yancheng Qiu

Hong Kong University of Science & Technology (HKUST)

Date Written: August 12, 2020

Abstract

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

Nozawa, Yoshio and Qiu, Yancheng, Corporate Bond Market Reactions to Quantitative Easing During the COVID-19 Pandemic (August 12, 2020). Available at SSRN: https://ssrn.com/abstract=3579346 or http://dx.doi.org/10.2139/ssrn.3579346

Yoshio Nozawa (Contact Author)

Hong Kong University of Science and Technology ( email )

Clearwater Bay Road
Sai Kun, NT
Hong Kong

Yancheng Qiu

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

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