Asset purchases and sovereign risk premia in the euro area during the pandemic

14/09/2022

ESM

Title: Asset purchases and sovereign risk premia in the euro area during the pandemic

Download PDF: Working Paper 55

This paper traces the impact of asset purchases during the Covid-19 pandemic on sovereign risk premia, distinguishing between announcements, expectations, and implementation effects.

Authors: Robert Blotevogel (ESM), Gergely Hudecz (ESM) and Elisabetta Vangelista (ESM).

Abstract:

We analyse the impact of ECB asset purchases on sovereign risk premia during the Covid-19 pandemic. Using an enhanced event study design, we trace the impact of asset purchases over time, distinguishing between announcements, expectations, and implementation effects. The analysis draws on a new granular cross-country dataset of the ECB’s asset purchases and market expectations. We find large announcement effects, particularly in countries with lower sovereign credit ratings. Expectations about the final size of ECB asset purchases (‘the stock’) and actually implemented net purchases (‘the flows’) affected risk premia at the time of severe market stress with large cross-country variations. Overall, the ECB’s asset purchases were highly effective in warding off risks of financial fragmentation in the euro area during the pandemic.

Disclaimer: This Working Paper should not be reported as representing the views of the ESM. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the ESM or ESM policy. No responsibility or liability is accepted by the ESM in relation to the accuracy or completeness of the information, including any data sets, presented in this Working Paper.

Keywords: Event study, sovereign risk premia, ECB asset purchases, stock and flow effects

JEL codes: E44, E58, E62, G14