Quantitative Easing and the Price-Liquidity Trade-Off

The Impact of the ECB Asset Purchases on the European Bond Market Structure: Granular Evidence on Ownership Concentration

“…This paper contributes to the literature by being the first to study how QE affects the underlying network structure of investors. Second, the increased market concentration as a result of QE provides support for other studies on the existence of preferred habitat investors in the euro area (Ferdinandusse et al, 2017;Boermans and Vermeulen, 2018).…”

“…They show that mainly foreign investors sold bonds to the Eurosystem, whereas insurers and pension funds bought these bonds despite the QE program. Ferdinandusse et al (2017) further suggest that insurers and pension funds are preferred habitat investors in the euro area. Using granular portfolio holdings data they construct a measure of market tightness defined as the share of preferred habitat investors, which is closely related to market concentration.…”

“…For example, Christensen and Gillan (2018) argue that the Federal Reserve purchases put the sellers of sovereign bonds in an advantageous position which should increase market liquidity. Ferdinandusse et al (2017) model this channel explicitly and show that QE may increase market liquidity in the very short term but may erode it in the longer term due to increasing scarcity of sovereign bonds available for purchases by central banks.…”

The Impact of Corporate QE on Liquidity: Evidence from the UK

“…Search frictions: Absent new issuance, asset purchases lead to a reduction in the quantity of bonds held by private investors. If there are search frictions, then this could reduce trading by making it more difficult for investors to be matched (Ferdinandusse et al, 2017). And if it becomes more difficult for dealers to source specific bonds in the secondary market, then the costs and risks of market-making could increase, reducing dealers' willingness to intermediate trades (Kandrac, 2018).…”

“…Moreover, asset purchases by a relatively price-insensitive central bank might distort price signals, reducing the willingness of market participants to trade. In theory, the net effect of these channels could be positive or negative (Ferdinandusse et al, 2017).…”