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Underpricing in the euro area bond market: New evidence from post-crisis regulation and quantitative easing

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  • Rischen, Tobias
  • Theissen, Erik

Abstract

We conduct an extensive study of underpricing in the euro area bond market and find strong evidence of underpricing. In cross-sectional regressions we find patterns that are consistent with bookbuilding-based theories of underpricing and inconsistent with liquidity-based explanations. The underpricing has increased considerably during the financial crisis and has remained at an elevated level since. We also show that secondary market liquidity in the euro area bond market is significantly lower in the post-crisis period than pre-crisis. These results are consistent with recent US evidence and may represent unintended side effects of new regulation enacted in the wake of the financial crisis, such as Basel III and the Volcker Rule. Furthermore, our evidence suggests that the ECB’s corporate sector purchase programs has led to a decrease in underpricing.

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  • Rischen, Tobias & Theissen, Erik, 2021. "Underpricing in the euro area bond market: New evidence from post-crisis regulation and quantitative easing," Journal of Financial Intermediation, Elsevier, vol. 46(C).
    • Handle: RePEc:eee:jfinin:v:46:y:2021:i:c:s1042957320300255
    DOI: 10.1016/j.jfi.2020.100871
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    More about this item

    Keywords

    Underpricing; Bond markets; Primary market; Post-Crisis regulation; ECB; Unconventional monetary policy; Quantitative easing; Asset purchase programs;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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