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Long-term liquidity effects of large-scale asset purchase programs: Evidence from the euro covered bond market

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  • Weigerding, Michael

Abstract

This study aims to improve the knowledge around extensive asset purchase programs and their impact on market liquidity. It documents that such programs can dampen liquidity. The analysis uses fixed-effects regressions and a unique dataset of global euro-denominated covered bonds, which quantitative easing has affected to a larger extent than other markets. While the start of the central bank purchases amplifies liquidity for several weeks, liquidity declines after half a year. The drop relates to the central bank’s bond inventory. It is partly mitigated by a reduction in buying, but liquidity does not fully recover. The contemporaneous flow effect of purchase program buying is initially positive, but becomes negative when liquidity deteriorates. These findings help designing policy and understanding behavioral liquidity effects.

Suggested Citation

  • Weigerding, Michael, 2023. "Long-term liquidity effects of large-scale asset purchase programs: Evidence from the euro covered bond market," International Review of Economics & Finance, Elsevier, vol. 87(C), pages 244-264.
    • Handle: RePEc:eee:reveco:v:87:y:2023:i:c:p:244-264
    DOI: 10.1016/j.iref.2023.04.010
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    More about this item

    Keywords

    Market liquidity; Market microstructure; Covered bond; Central bank purchases;
    All these keywords.

    JEL classification:

    • 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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