International Finance Discussion Papers (IFDP)

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July 2015

The Liquidity Effects of Official Bond Market Intervention

Michiel De Pooter, Robert F. Martin, and Seth Pruitt

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

DOI: http://dx.doi.org/10.17016/IFDP.2015.1138

PDF: Full Paper

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Last Update: June 19, 2020