The impact of the ECB's asset purchase programme on core and peripheral sovereign yields and its transmission channels

Abstract

Using data from June 2014 to March 2018, this paper analyses the transmission channels of the announcement effects of the ECB's asset purchase programme (APP) on core and peripheral sovereign yields at different maturities. To the best of our knowledge, we are the first to study in as much detail these transmission channels. Our results show these effects operate through different channels, and their magnitude is larger the longer the maturity. For the ECB's APP, we find evidence that when policy is more expansionary than expected, yields drop through a signalling, a preferred-habitat and a duration premium channel; when policy is more contractionary than expected yields rise via these channels. We also report important credit and liquidity channel effects for peripheral markets: these are very significant both for expansionary and contractionary surprises, and they have the expected direction – expansionary surprises lead to lower yields through these channels and contractionary surprises lead to higher ones. On another hand credit and liquidity effects for core markets are symmetric to the peripheral markets' and our paper is the first to empirically identify and quantify the impact of two different quantitative easing (QE) factors, one that is related to overall stimulus and another one that may differentially affect sovereign yields. We also confirm previous findings about non-linearity of asset price responses, since although the direction of effects for expansionary and contractionary surprises is usually different its magnitude is generally not.