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Central bank-driven mispricing

Loriana Pelizzon (), Marti G. Subrahmanyam, Davide Tomio and Jun Uno

No 226, SAFE Working Paper Series from Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt

Abstract: We show that bond purchases undertaken in the context of quantitative easing efforts by the European Central Bank created a large mispricing between the market for German and Italian government bonds and their respective futures contracts. On top of the direct effect the buying pressure exerted on bond prices, we show three indirect effects through which the scarcity of bonds, resulting from the asset purchases, drove a wedge between the futures contracts and the underlying bonds: the deterioration of bond market liquidity, the increased bond specialness on the repurchase agreement market, and the greater uncertainty about bond availability as collateral.

Keywords: Central Bank Interventions; Liquidity; Sovereign Bonds; Futures Contracts; Arbitrage (search for similar items in EconPapers)
JEL-codes: G01 G12 G14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-eec and nep-mon
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:226

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