The impact of the ECB's PEPP project on the COVID-19-Induced crisis in the corporate bond market

Lior Cohen and Itai Furman

Economics Letters, 2024, vol. 235, issue C

Abstract: We examine the financial crisis in the European corporate bond market following the COVID-19 pandemic and assess the effectiveness of the ECB's QE program, PEPP, in mitigating it. Using credit (Z-spread) and liquidity (scaled bid-ask spread) spreads, we find that the crisis elevated Z-spreads of corporate bonds and mostly raised the bid-ask spread of ineligible bonds – indicating that the pre-pandemic QE shored up the liquidity of eligible bonds. Moreover, ineligible bonds issued by firms in COVID-19 hard-hit industries experienced the steepest increase in the credit and liquidity spreads. The results show that PEPP decreased the credit spreads of ineligible bonds via the portfolio rebalancing channel, especially in pandemic-sensitive industries; however, it did not improve corporate bonds’ liquidity conditions.

Keywords: COVID-19; Quantitative easing; Liquidity crunch; Financial crisis; PEPP; ECB (search for similar items in EconPapers)
JEL-codes: E52 E58 G12 (search for similar items in EconPapers)
Date: 2024
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Journal Article: The impact of the ECB's PEPP project on the COVID-19-Induced crisis in the corporate bond market (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:235:y:2024:i:c:s0165176524000478

DOI: 10.1016/j.econlet.2024.111563

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