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Central banks’ corporate asset purchase programmes and risk-taking by bond funds in the aftermath of market stress

Nicola Branzoli, Raffaele Gallo, Antonio Ilari and Dario Portioli

Journal of Financial Stability, 2024, vol. 72, issue C

Abstract: This paper provides evidence that central banks’ purchase programmes of corporate bonds in the aftermath of market stress foster risk-taking by bond funds. Using the COVID-19 shock as a laboratory, we show that funds more exposed to pandemic-related asset purchase programmes took on more credit and liquidity risks than less exposed ones during 2020, generating higher returns and attracting more inflows. More exposed funds increased their risk-taking buying assets not eligible for central banks’ interventions, particularly when they under-performed their peers or held less liquid assets. These results suggest that asset purchase programmes affected risk-taking by reducing liquidation costs and, thus, lowering the risk of run by fund investors. We discuss the implications for the transmission of policy interventions during periods of market stress and the regulation of the investment fund sector.

Keywords: corporate bond funds; market stress; asset purchase programmes; risk-taking (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:72:y:2024:i:c:s1572308924000469

DOI: 10.1016/j.jfs.2024.101261

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Journal of Financial Stability is currently edited by I. Hasan, W. C. Hunter and G. G. Kaufman

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