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The Liquidity Effects of Official Bond Market Intervention

Published online by Cambridge University Press:  16 January 2018

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To “ensure depth and liquidity,” the European Central Bank intervened in sovereign debt markets through its Securities Markets Programme (SMP), providing a unique opportunity to estimate the effects of large-scale asset purchases on sovereign bond liquidity premia. From reduced-form estimates, we find robust, economically significant impact and lasting reductions in sovereign bonds’ liquidity premia in response to official purchases. We develop a search-based asset-pricing model to understand our empirical results. The theory implies that bond liquidity premia fall in response to both official purchases and rising sovereign default probabilities, as seen in the data.

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



We thank an anonymous referee, Jean Barthelemy, Michael Bauer, Luca Benzoni, Stephen Brown (the editor), Christian Upper, Justin Wang, and seminar participants at the Federal Reserve Board of Governors, the Federal Reserve Bank of San Francisco, the European Central Bank, and the 2013 European Financial Management Association Annual Meetings for very helpful comments. Rebecca DeSimone provided outstanding research assistance for which we are grateful. All remaining errors are our own. The views expressed in this paper are solely those of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of any other employee of the Federal Reserve System.


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