Working Paper

The Liquidity Effects of Official Bond Market Intervention

Abstract: To \"ensure depth and liquidity,\" the European Central Bank in 2010 and 2011 repeatedly intervened in sovereign debt markets through its Securities Markets Programme. These purchases provide a unique natural experiment for testing the effects of large-scale asset purchases on risk premia arising from liquidity concerns. To explore how official intervention influences liquidity premia, we develop a search-based asset-pricing model. Consistent with our model's predictions, we find statistically and economically significant stock and flow effects on sovereign bonds' liquidity premia in response to official purchases.

Keywords: Securities Markets Programme; European Central Bank; bond; liquidity risk; search and matching;

JEL Classification: D83; E43; E58; G12;

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Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: International Finance Discussion Papers

Publication Date: 2015-07-02

Number: 1138

Pages: 78 pages