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

54 Pages Posted: 21 Apr 2020 Last revised: 18 Apr 2021

See all articles by Yoshio Nozawa

Yoshio Nozawa

University of Toronto

Yancheng Qiu

Hong Kong University of Science & Technology (HKUST)

Date Written: April 18, 2021

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 but spread across various 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 corresponds 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: 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 (April 18, 2021). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3579346 or http://dx.doi.org/10.2139/ssrn.3579346

Yoshio Nozawa (Contact Author)

University of Toronto ( email )

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Toronto, ON M5S3E6
Canada
3013125569 (Phone)

Yancheng Qiu

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

Clearwater Bay
Kowloon, 999999
Hong Kong

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