Working Papers

Price pressure during central bank asset purchases: Evidence from covered bonds

This paper evaluates the effect of the European Central Bank's (ECB) covered bond purchase program in 2014-2017 on credit spreads and issuance volumes of covered bonds. Uniquely, the ECB employed a purchase key, addressing the identification problem that central bank buying is yield dependent. Using a difference-in-difference methodology, it compares closely matched covered bonds from different countries, with a particular focus on market segmentation, purchase eligibility and regulatory treatment. The total credit spread impact was -16.31 basis points, corresponding to a price elasticity of 24.15. The paper estimates positive abnormal issuance (45.80% of purchases) consistent with catering to investor clienteles. 

Presentations: EFA in Barcelona (2022), SFI Job Market Workshop (2020), SFI Research Days (2020), University of Zurich (2020), Columbia Business School (2020), SFI Research Days (2019)

The effect of the ECB collateral framework on security issuance choices: Evidence from country ceilings

The study examines capital raising choices in Italy between 1999-2021 around Moody's A- downgrade of the sovereign, a threshold for bond haircuts in the European Central Bank's (ECB) collateral framework. Sovereign ratings constrain most ratings in a country due to rating agencies' country ceilings, with the exception of secured bonds. The study links the A- downgrade to an increase in issuance volumes and in the prices of secured bonds. It addresses various alternative explanations such as adverse selection or the ECB's purchase programs. Overall, issuers who can issue bonds with rating notch-ups face advantageous financial conditions when the country ceiling constrains credit ratings in an economy.

Presentations: Graduate Institute Geneva (2020), SFI Research Days (2018), Humboldt University of Berlin (2018), University of Zurich (2017)

Work in progress

Are ECB announcement days special? Evidence from QE announcements

Using a data set of the most liquid euro denominated corporate bonds between 2004-2020, this study shows that excess bond returns are on average significantly positive and have a one factor structure on ECB policy announcement days. Moreover, this pattern is there on average on all ECB announcement days post-2012 but not before. Beta and a Value at Risk (VaR) measure of past returns explain the same cross-sectional variation in announcement returns, but the VaR measure drives out beta. The results support the view that a central bank put explains announcement day returns. When the ECB reacts with accommodative policy to market turmoil, it particularly boosts returns of those assets that have lost the most, i.e. with a high beta and high VaR. 

Presentations: EFMA in Cardiff (2023)

Publications

The term structure of interest rates in a New Keynesian Policy model, (with Daniel Buncic), Journal of Macroeconomics, 50, 126-150, 2016.

We jointly estimate a New Keynesian policy model with a Gaussian affine no-arbitrage specification of the term structure of interest rates, and assess how important inflation, output and monetary policy shocks are as sources of fluctuations in interest rates and the term premium. We work with observable pricing factors and utilize the computationally convenient normalization of Joslin et al. (2013b). This allows us to estimate the model without needing to restrict the parameters driving the market prices of risk. Using data for the U.S. from 1962:Q1 to 2014:Q2, we find that inflation and the output gap account for around 80% of the unconditional forecast error variance of bond yields at the short and medium end of the term structure, while monetary policy shocks account for around 20%. Bond yields respond to macroeconomic shocks only gradually, peaking after about 4 quarters. This is due to sizable monetary policy inertia estimates in our model. At the peak of the response, inflation shocks increase bond yields by more than one-to-one, and output shocks by less than one-to-one, which is consistent with a Taylor type monetary policy rule. Our term premium estimate is strongly counter-cyclical and can capture salient features of the term structure that constitute a puzzle in the expectations hypothesis.