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The Market Microstructure of Central Bank Bond Purchases

Published online by Cambridge University Press:  11 October 2018


We study quantitative easing (QE) policies from a microstructure perspective, drawing on intraday transaction-level data for German bonds (purchased under the Eurosystem’s QE program). An initial analysis of purchase decisions reveals that portfolio managers consider liquidity and the scarcity of securities in repo markets. Suggestive of significant flow effects, we detect price impacts of purchases at high and low frequencies. We find the impact on market liquidity and functioning to be ambiguous. A higher purchase volume lowers transaction costs but has an adverse impact on order-book depth. The price impact varies with market conditions and is higher for more illiquid bonds.

Research Article
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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We are grateful to an associate editor, Ryan Banerjee, Alexander Duering, Terry Hendershott, Mike Joyce, John Kandrac (the referee), Christoph Memmel, Michael Moore, Christian Speck, Vlad Sushko, Michael Weber, Haoxiang Zhu, and seminar participants at the Federal Reserve Bank of New York, the Bank of Canada, the Bundesbank-OeNB Markets seminar in Hamburg, Banco d’Espana, the University of Mannheim, and Deutsche Bundesbank for helpful comments and suggestions. We thank portfolio managers and bond traders in the Markets Division of Deutsche Bundesbank for numerous discussions and information on implementation details of the public-sector purchase programme. Thanks to Amy Wood for assistance with the graphs. A previous version of this article was circulated under the title “Scarcity Effects of QE: A Transaction-Level Analysis in the Bund Market.” The views expressed in this article are those of the authors and do not necessarily reflect those of the BIS, Deutsche Bundesbank, or the Eurosystem.


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