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How QE changes the nature of sovereign risk

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  • Dirk Broeders
  • Leo de Haan
  • Jan Willem van den End

Abstract

We examine the effect of Quantitative Easing (QE) by the ECB on the sovereign bond risks of Italy, Ireland, Spain and Portugal. First, outcomes of panel regression models suggest that QE lowered the effect of volatility on sovereign bond spreads by 1 to 2 percentage points. Compared to asset purchases aimed at easing the monetary stance, purchase programmes supporting monetary transmission by countering financial market stress most clearly reduced the effect of volatility on spreads. Second, using a contingent claims model (CCM), the values of the implicit put options provided by QE as a backstop to investors are calculated to be substantial. Our results guide policymakers on the use of backstop facilities for sovereign bond markets.

Suggested Citation

  • Dirk Broeders & Leo de Haan & Jan Willem van den End, 2022. "How QE changes the nature of sovereign risk," Working Papers 737, DNB.
    • Handle: RePEc:dnb:dnbwpp:737
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    Cited by:

    1. Cañon, Carlos & Gerba, Eddie & Pambira, Alberto & Stoja, Evarist, 2024. "An unconventional FX tail risk story," LSE Research Online Documents on Economics 125291, London School of Economics and Political Science, LSE Library.
    2. Matteo Bonetti & Dirk Broeders & Damiaan Chen & Daniel Dimitrov, 2024. "Central Bank Capital and Shareholder Relationship," Working Papers 809, DNB.
    3. Andrejs Zlobins, 2023. "Is There a Portfolio Rebalancing Channel of QE in Latvia?," Working Papers 2023/05, Latvijas Banka.

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    More about this item

    Keywords

    Quantitative Easing; Sovereign risk; Sovereign spreads; Contingent Claims Model;
    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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