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The market stabilization role of central bank asset purchases: high-frequency evidence from the COVID-19 crisis

Marco Bernardini () and Annalisa De Nicola ()
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Annalisa De Nicola: Bank of Italy

No 1310, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: This paper uses confidential high-frequency data to investigate the dynamic effects on the government bond market of the central bank asset purchases carried out in Italy during the COVID-19 pandemic crisis. We find that in response to an outright purchase of long-term bonds: (i) long-term yields drop by 4 to 5 basis points per billion euros on impact and tend to remain subdued over the trading day; (ii) short- and medium-term bond yields are also strongly affected; (iii) the yield curve shifts downwards and flattens owing to a reduction in the credit and liquidity risk premia embedded in sovereign spreads; (iv) market liquidity improves steadily. We also show that: (v) the yield impact of a purchase is substantially larger in times of heightened market stress; (vi) asset purchases operate similarly and effectively in quieter times as well. These results suggest that actual purchases affect market prices over and above purchase announcements, and that adjusting their pace and composition according to market conditions can boost the overall effectiveness of a programme.

Keywords: monetary policy; asset purchases; high-frequency data; local projections (search for similar items in EconPapers)
JEL-codes: C22 E43 E44 E52 E58 (search for similar items in EconPapers)
Date: 2020-12
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
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