Impact of QE on European sovereign bond market

This paper tries to evaluate the impact of the ECB's QE programs on the equilibrium of European sovereign bond markets. For this purpose, we develop an original theoretical model to understand the formation of long-term sovereign rates in the euro area. Precisely, it's an international bond portfolio choice model with two countries which generalizes the traditional results of the term structure interest rates theory. Particularly, except for traditional properties, long-term equilibrium rates depend as well as on the anticipated variances and covariances, considered as a component of a volatility risk premium, of future bond yields. By using CDS as a variable to control default risks, the model is tested empirically over the period January 2006 to September 2016. We can conclude that the ECB's QE programs beginning from March 2015, have accelerated the "defragmentation process" of the European bond markets, already initiated since the OMT. However, according to the test à la Forbes and Rigobon, it seems difficult to affirm that QE programs have led to a significant increase in the conditional correlations between bond markets. In a supplementary empirical test, we show that QE has significantly reduced the sensitivities of bond yield spreads to the premiums paid on sovereign CDS.