Asset Purchase Programmes and Financial Markets: Lessons from the Euro Area

By Carlo Altavilla, Giacomo Carboni, Roberto Motto. Social Science Research Network, 2015

284 citations recorded by the source corpus.

We evaluate the effects on asset prices of the ECB asset purchase programme (APP) announced in January 2015 and assess its main transmission channels. We do so by first extending a term structure model with bond supply effects to account for assets with different types of risk premia. We then derive model-based predictions for cross-asset price movements associated with the transmission channels identified in the model. We finally validate empirically these predictions by means of an event- study methodology, reaching the following conclusions: The impact of the APP on asset prices is sizeable albeit the programme was announced at a time of low financial distress. This may appear puzzling in light of existing literature that finds a large impact of asset purchases only in periods of high financial distress. Consistent with the model, we explain this apparent puzzle by showing how the low financial distress, while indeed weakening certain transmission channels, has reinforced other channels because of its interplay with the asset composition of the programme. Targeting assets at long maturity and spanning the investment-grade space have supported the duration and the credit channels. At the same time, the low degree of financial stress prevailing at announcement of the programme, while weakening the local supply channel, has facilitated spill-overs to non-targeted assets. JEL Classification: E43, E44, E52, E58, E65, G14

Subfields: Finance

View Paper: https://www.semanticscholar.org/paper/78fc6a28f2c1dcd77acf8e1d2cc6730c06cdf9df

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Citations in the corpus

Impact of the Asset Purchase Programme on euro area government bond yields using market news (2020, unknown): “Altavilla et al. (2015) use a traditional event study, but address this issue by considering also a series of key events associated to key ECB policy statements before the announcement.”
Necessity As the Mother of Invention: Monetary Policy after the Crisis (2017, background): “Altavilla et al. (2015) report that the ECB’s QE has significantly lowered yields for a broad set of market segments, with effects that generally rise with maturity and riskiness of assets.”
How Does Monetary Policy Affect Income and Wealth Inequality? Evidence from Quantitative Easing in the Euro Area (2018, background): “To pin down the constant to a reasonable value, we set the size of the shock to imply a 30 basis points impact reduction in the euro area long-term interest rate, the lower boundary of the estimated effects of the first QE announcement on the euro area long-term bond yields (Altavilla et al., 2015).”
Measuring euro area monetary policy (2019, unknown): “We do not separately report or discuss these. affected Spanish and especially Italian long-term yields more than the safe rate, narrowing spreads on impact, consistent with the evidence in Altavilla et al. (2015) .”
Mending the broken link: Heterogeneous bank lending rates and monetary policy pass-through (2020, methodology): “We calculate the responses of certain variables to announcements of non-standard measures from May 2014 to December 2015 using a high-frequency event-study methodology (see e.g. Krishnamurthy and Vissing-Jorgensen 2011; Altavilla et al. 2015).”