The Impact of the ECB’s PEPP Project on the COVID-19-Induced Crisis in the Corporate Bond Market

31 Pages Posted: 8 Feb 2024 Last revised: 29 Feb 2024

See all articles by Lior Cohen

Lior Cohen

University of Barcelona

Itai Furman

Tel Aviv University

Date Written: January 21, 2024

Abstract

We examine the financial crisis in the European corporate bond market following the COVID-19 pandemic and assess the effectiveness of the ECB’s QE program, PEPP, in mitigating it. Using credit (Z-spread) and liquidity (scaled bid-ask spread) spreads, we find that the crisis elevated Z-spreads of corporate bonds and mostly raised the bid-ask spread of ineligible bonds – indicating that the pre-pandemic QE shored up the liquidity of eligible bonds. Moreover, ineligible bonds issued by firms in COVID-19 hard-hit industries experienced the steepest increase in the credit and liquidity spreads. The results show that PEPP decreased the credit spreads of ineligible bonds via the portfolio rebalancing channel, especially in pandemic-sensitive industries; however, it did not improve corporate bonds’ liquidity conditions.

Keywords: COVID-19, Quantitative easing, liquidity crunch, financial crisis, PEPP, ECB

JEL Classification: E52, E58, G12.

Suggested Citation

Cohen, Lior and Furman, Itai, The Impact of the ECB’s PEPP Project on the COVID-19-Induced Crisis in the Corporate Bond Market (January 21, 2024). Economics Letters 235 (February 2024), 111563 , Available at SSRN: https://ssrn.com/abstract=4701825

Lior Cohen (Contact Author)

University of Barcelona ( email )

Gran Via de les Corts Catalanes, 585
Barcelona, 08007
Spain

Itai Furman

Tel Aviv University ( email )

Ramat Aviv
Tel-Aviv, 6997801
Israel

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