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Spillover effects of sovereign bond purchases in the euro area

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  • Yvo Mudde
  • Anna Samarina
  • Robert Vermeulen

Abstract

This paper investigates cross-border spillover effects from the Eurosystem’s Public Sector Purchase Programme (PSPP) on euro area government bond yields. We distinguish between the direct effects of domestic bond purchases by national central banks and the indirect effects from bond purchases by national central banks in other euro area countries over the period March 2015 - December 2018. The results reveal substantial spillover effects across the euro area, providing evidence for strong arbitrage within the euro area. These spillover effects are particularly large for long-term bonds and for bonds issued by non-core countries. The larger impact of spillovers in these cases can be explained by investors rebalancing towards higher yielding government bonds. In addition, purchases under PSPP had their largest impact on bond yields in 2015.

Suggested Citation

  • Yvo Mudde & Anna Samarina & Robert Vermeulen, 2021. "Spillover effects of sovereign bond purchases in the euro area," Working Papers 706, DNB.
    • Handle: RePEc:dnb:dnbwpp:706
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    File URL: https://www.dnb.nl/media/3fujcgib/working_paper_no-_706.pdf
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    References listed on IDEAS

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    1. Costantini, Mauro & Fragetta, Matteo & Melina, Giovanni, 2014. "Determinants of sovereign bond yield spreads in the EMU: An optimal currency area perspective," European Economic Review, Elsevier, vol. 70(C), pages 337-349.
    2. Ralph S. J. Koijen & Motohiro Yogo, 2019. "A Demand System Approach to Asset Pricing," Journal of Political Economy, University of Chicago Press, vol. 127(4), pages 1475-1515.
    3. W. Arrata & B. Nguyen, 2017. "Price impact of bond supply shocks: Evidence from the Eurosystem's asset purchase program," Working papers 623, Banque de France.
    4. Marcel Fratzscher & Marco Lo Duca & Roland Straub, 2016. "ECB Unconventional Monetary Policy: Market Impact and International Spillovers," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 64(1), pages 36-74, May.
    5. Roberto A. De Santis & Fédéric Holm‐Hadulla, 2020. "Flow Effects of Central Bank Asset Purchases on Sovereign Bond Prices: Evidence from a Natural Experiment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(6), pages 1467-1491, September.
    6. Carlo Altavilla & Giacomo Carboni & Roberto Motto, 2021. "Asset Purchase Programs and Financial Markets: Lessons from the Euro Area," International Journal of Central Banking, International Journal of Central Banking, vol. 17(70), pages 1-48, October.
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    Cited by:

    1. Hudepohl, Tom & Malderez, Suzanne, 2024. "The use of the Eurosystem’s monetary policy instruments and its monetary policy implementation framework in 2022 and 2023," Occasional Paper Series 355, European Central Bank.
    2. Broeders, Dirk & de Haan, Leo & Willem van den End, Jan, 2023. "How quantitative easing changes the nature of sovereign risk," Journal of International Money and Finance, Elsevier, vol. 137(C).
    3. Andrejs Zlobins, 2023. "Is There a Portfolio Rebalancing Channel of QE in Latvia?," Working Papers 2023/05, Latvijas Banka.

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    More about this item

    Keywords

    Public Sector Purchase Programme; euro area; spillovers; government bonds;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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