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The Impact of the ECB's Asset Purchase Programmes on Sovereign Bond Spreads in the Euro Area

Gibran Watfe

No 35, Bruges European Economic Research Papers from European Economic Studies Department, College of Europe

Abstract: This paper estimates the immediate impact of the European Central Bank's asset purchase programmes on sovereign bond spreads in the euro area between 2008 and 2015 using a country-by-country GARCH model. The baseline estimates are rigorously diagnosed for misspeci cation and subjected to a wide range of sensitivity tests. Among others, changes in the dependent variable, the independent variables and the number of (G)ARCH terms are tested. Moreover, the model is applied to subsamples and dynamic conditional cor- relations are analyzed to estimate the e ects of the asset purchases on the contagion of spread movements. Generally, it is found that the asset purchase programmes triggered an reduction of sovereign bond spreads. More speci cally, the Securities Markets Programme (SMP) had the most signi cant immediate e ects on sovereign bond spreads across the euro area. The announcements related to the Outright Monetary Transactions (OMT) programme also yielded substantial spread compression in the periphery. In contrast to that, the most recent Public Sector Purchase Programme (PSPP) announced in January 2015 and implemented since March 2015 had no signi cant immediate e ects on sovereign bond spreads, except for Irish spreads. Hence, immediate e ects seem to be dependent upon the size of the programme, the extent to which it targets distressed sovereigns and the way in which it is communicated.

Keywords: European Central Bank; asset purchase programmes; sovereign bond yield spreads; event study; GARCH model (search for similar items in EconPapers)
JEL-codes: E52 E58 E44 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-mac and nep-mon
Date: 2015-09
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