The Transmission Channels of Quantitative Easing: Evidence from the Cross-Section of Bond Prices and Issuance

Abstract

An updated version of this paper, titled "Demand-Driven Bond Financing in the Euro Area", is available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3791730

We test through which channels quantitative easing affects the prices and issuance of securities. We exploit the announcement of the corporate bond purchase program by the European Central Bank, and we study the impact of the announcement on the cross-section of European corporate bonds. We find that as the Central Bank increased the demand for bonds eligible for the program, eligible firms responded by substituting the issuance of ineligible bonds with the issuance of eligible bonds. As a result, bond prices were unaffected by their eligibility status, and all firms increased total issuance to the same extent. We show that monetary policy affected bond prices through a risk channel. Prices increased significantly more for bonds and firms that were exposed to higher levels of risk and uncertainty. However, risky firms did not issue more in response.

Keywords: Market timing, corporate bonds, credit risk, capital structure, quantitative easing, CSPP, PSPP, transmission channels

JEL Classification: G32, G14, G38, G18, E52, E58, E44