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The impact of the ECB's PEPP project on the COVID-19-Induced crisis in the corporate bond market

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  • Cohen, Lior
  • Furman, Itai

Abstract

We examine the financial crisis in the European corporate bond market following the COVID-19 pandemic and assess the effectiveness of the ECB's QE program, PEPP, in mitigating it. Using credit (Z-spread) and liquidity (scaled bid-ask spread) spreads, we find that the crisis elevated Z-spreads of corporate bonds and mostly raised the bid-ask spread of ineligible bonds – indicating that the pre-pandemic QE shored up the liquidity of eligible bonds. Moreover, ineligible bonds issued by firms in COVID-19 hard-hit industries experienced the steepest increase in the credit and liquidity spreads. The results show that PEPP decreased the credit spreads of ineligible bonds via the portfolio rebalancing channel, especially in pandemic-sensitive industries; however, it did not improve corporate bonds’ liquidity conditions.

Suggested Citation

  • Cohen, Lior & Furman, Itai, 2024. "The impact of the ECB's PEPP project on the COVID-19-Induced crisis in the corporate bond market," Economics Letters, Elsevier, vol. 235(C).
    • Handle: RePEc:eee:ecolet:v:235:y:2024:i:c:s0165176524000478
    DOI: 10.1016/j.econlet.2024.111563
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    More about this item

    Keywords

    COVID-19; Quantitative easing; Liquidity crunch; Financial crisis; PEPP; ECB;
    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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