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Quantitative Easing and Exuberance in Government Bond Markets: Evidence from the ECB's Expanded Assets Purchase Program

Listed author(s):
  • Martijn (M.I.) Droes

    ()

    (University of Amsterdam & Amsterdam School of Real Estate; Tinbergen Institute, The Netherlands)

  • Ryan van Lamoen

    ()

    (Dutch Central Bank)

  • Simona Mattheussens

    ()

    (Dutch Central Bank)

Registered author(s):

    This paper examines whether the ECB's Quantitative Easing (QE) policy is causing government bond prices to deviate from their fundamental value. We use a recent advance in the methodology to measure exuberant price behavior in financial time series introduced by Phillips et al. (2015). We extend this methodology and apply it to government bond prices. The results show that the QE policy substantially inflated government bond prices in Euro Area countries to such an extent that bond prices are no longer in line with the underlying fundamental value. We argue that careful monitoring is required when the QE policy is eventually reversed. The test procedure outlined in this paper provides a monitoring tool to do so.

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    File URL: http://papers.tinbergen.nl/17080.pdf
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    Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 17-080/IV.

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    Date of creation: 05 Sep 2017
    Handle: RePEc:tin:wpaper:20170080
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    1. Peter C. B. Phillips & Shuping Shi & Jun Yu, 2015. "Testing For Multiple Bubbles: Historical Episodes Of Exuberance And Collapse In The S&P 500," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56, pages 1043-1078, November.
    2. Georgiadis, Georgios & Gräb, Johannes, 2016. "Global financial market impact of the announcement of the ECB's asset purchase programme," Journal of Financial Stability, Elsevier, vol. 26(C), pages 257-265.
    3. Bos, Jaap W.B. & Kolari, James W. & van Lamoen, Ryan C.R., 2013. "Competition and innovation: Evidence from financial services," Journal of Banking & Finance, Elsevier, vol. 37(5), pages 1590-1601.
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