Is the Bond Market Competitive? Evidence From the ECB's Asset Purchase Programme

69 Pages Posted: 28 Aug 2023 Last revised: 29 Feb 2024

See all articles by Johannes Breckenfelder

Johannes Breckenfelder

European Central Bank (ECB) - Financial Research

Pierre Collin-Dufresne

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute; National Bureau of Economic Research (NBER)

Stefano Corradin

European Central Bank

Date Written: May 26, 2020

Abstract

We document a recurring pattern in sovereign bond prices during the Eurosystem's Public Sector Purchase Program (PSPP): a predictable rise towards month-end, followed by a subsequent drop. We propose a dynamic search-bargaining model of Bertrand competition under uncertainty that captures salient elements of the PSPP, in which imperfect competition among dealers generates such a predictable price pattern. Consistent with the model predictions, we find it to be more significant: (a) for bonds specifically targeted by the PSPP, (b) during monthly intervals wherein the Eurosystem engages with a lower number of counterparties, and (c) when the Eurosystem targets a larger purchase amount. Finally, we explore the potential consequences of our findings for the design and implementation of future asset purchase programs.

Keywords: Quantitative Easing, Sequential Search-Bargaining Model, Imperfect Competition, Dealers, Financial Market Design

JEL Classification: G12, G21, E52, E58

Suggested Citation

Breckenfelder, Johannes and Collin-Dufresne, Pierre and Corradin, Stefano, Is the Bond Market Competitive? Evidence From the ECB's Asset Purchase Programme (May 26, 2020). Swiss Finance Institute Research Paper No. 23-104, Available at SSRN: https://ssrn.com/abstract=4541374 or http://dx.doi.org/10.2139/ssrn.4541374

Johannes Breckenfelder

European Central Bank (ECB) - Financial Research ( email )

Sonnemannstrasse 20
D-60314 Frankfurt am Main
Germany

HOME PAGE: http://johannesbreckenfelder.eu/

Pierre Collin-Dufresne

Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Dorigny, Bâtiment Extranef, # 211
40, Bd du Pont-d'Arve
CH-1015 Lausanne, CH-6900
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Stefano Corradin (Contact Author)

European Central Bank ( email )

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