QE in the euro area: Has the PSPP benefited peripheral bonds?

The Public Sector Purchase Programme of the euro area, PSPP, which started in 2015, constitutes an interesting special case of Quantitative Easing (QE) because it involved the purchase of peripheral euro area government bonds, which were clearly not riskless. Moreover, these purchases were undertaken by national central banks at their own risk. Intuition suggests, and a simple model confirms, that, ceteris paribus, large purchases by a central bank of the bonds of its own sovereign could increase the risk for the remaining private bond holders – if this purchase occurs within a monetary union where the national central banks have no autonomy left. Our empirical analysis suggests that risk premiums on peripheral bonds did not follow a random walk, contrary to what is assumed in event studies, implying that the announcement effects might not have been permanent. We find that the announcements of bond buying (and its implementation) did not change the stochastics of these premiums and had a smaller impact on CDS spreads which provide another measure of risk.