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The Liquidity Effects of Official Bond Market Intervention

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  • De Pooter, Michiel
  • Martin, Robert F.
  • Pruitt, Seth

Abstract

To “ensure depth and liquidity,†the European Central Bank intervened in sovereign debt markets through its Securities Markets Programme (SMP), providing a unique opportunity to estimate the effects of large-scale asset purchases on sovereign bond liquidity premia. From reduced-form estimates, we find robust, economically significant impact and lasting reductions in sovereign bonds’ liquidity premia in response to official purchases. We develop a search-based asset-pricing model to understand our empirical results. The theory implies that bond liquidity premia fall in response to both official purchases and rising sovereign default probabilities, as seen in the data.

Suggested Citation

  • De Pooter, Michiel & Martin, Robert F. & Pruitt, Seth, 2018. "The Liquidity Effects of Official Bond Market Intervention," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 53(1), pages 243-268, February.
    • Handle: RePEc:cup:jfinqa:v:53:y:2018:i:01:p:243-268_00
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    More about this item

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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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