01 Sep 2018

New Project Output "Quantitative Easing and Financial (In)Stability"

SAFE Working Paper on the impact of the Quantitative Easing by European Central Bank

The paper "Central Bank-Driven Mispricing” by Loriana Pelizzon, Marti Subrahmanyam, Davide Tomio and Jun Uno (2018) has been finalized for the project ”Quantitative Easing and Financial (In)Stability” funded by Volkswagen Foundation and was included in the SAFE Working Paper Series as SAFE WP 226.  

The paper shows that bond purchases undertaken in the context of quantitative easing efforts by the European Central Bank created 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, the authors 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.