Is the Bond Market Competitive? Evidence From the ECB's Asset Purchase Programme

Johannes Breckenfelder, Pierre Collin-Dufresne and Stefano Corradin
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Pierre Collin-Dufresne: École Polytechnique Fédérale de Lausanne; Swiss Finance Institute; NBER
Stefano Corradin: European Central Bank

No 23-104, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We document a recurring pattern in German sovereign bond prices during the Eurosystem's Public Sector Purchase Program (PSPP): a predictable rise towards month-end, followed by a subsequent drop. We propose a sequential search-bargaining model, capturing salient elements of the PSPP's implementation, such as the commitment to transact within an explicit time horizon. The model suggests that this predictable pattern emerges as a consequence of imperfect competition among dealers who are counterparties to the Eurosystem. Predicated on the model's implications, we find that the price fluctuations are markedly accentuated: (a) for bonds specifically targeted by the PSPP, (b) during monthly intervals wherein the Eurosystem engages with a lower number of counterparties, and (c) when the Eurosystem aims for a larger purchase amount. Finally, we explore the potential consequences of our findings for the design and implementation of future asset purchase programs.

Keywords: Quantitative Easing; Sequential Search-Bargaining Model; Imperfect Competition; Dealers; Financial Market Design (search for similar items in EconPapers)
JEL-codes: E52 E58 G12 G21 (search for similar items in EconPapers)
Pages: 70 pages
Date: 2023-11
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-eur and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp23104

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