SAFE Working Paper No. 226

Central Bank-Driven Mispricing

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.


Presented at:

• EIEF – Einaudi Institute for Economics and Finance in Rome (Jul 2017)

• 5th International Conference on Sovereign Bond Markets in Ottawa (Apr 2018)

• Office of Financial Research in Washington (Sep 2018)

• Board of the Federal Reserve in Washington (Oct 2018)

• UK Debt Management Office in London (Dec 2018)

• ESMA Conference in Milan (Mar 2019)

• SFS Cavalcade North America in Pittsburgh (May 2019)