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

Abstract

We document a predictable rise towards month-end, followed by a subsequent drop, in sovereign bond prices during the Eurosystem’s Public Sector Purchase Program (PSPP), with no evidence of a correlated pattern in the Eurosystem’s trades. We model the PSPP as a dynamic search-bargaining model of Bertrand competition under uncertainty, in which imperfect competition among dealers generates a predictable pattern in prices that is uncorrelated with the trading volume. Consistent with the model, the price anomaly is more significant: (a) for bonds specifically targeted by the PSPP, (b) during months with fewer counterparties, and (c) when the Eurosystem purchases are larger.

Keywords: Quantitative Easing, Sequential Search-Bargaining, Imperfect Competition, Dynamic Bertrand Competition, Dealers, Market Structure

JEL Classification: G12, G1, G18, D44