The visible hand of the central bank: Evidence from the ECB's Corporate Sector Purchase Program

Sammanfattning: On March 10, 2016 the ECB surprised financial markets by announcing the latest measure taken under its unconventional asset purchase programs, the CSPP. Through this program the ECB is purchasing corporate bonds and aims to support bond valuations through supply shocks. In this paper we investigate the short-term impact on corporate credit spreads from the CSPP supply shocks and find evidence in favor of local supply effects on the French non-financial corporate bond market. Using Nelson Siegel estimated credit spreads and a difference-in-differences regression methodology, we document an economically and statistically significant credit spread narrowing for CSPP eligible and purchased short-term corporate bonds. Our findings highlight the merit of theories allowing for segmented markets and challenge traditional theories of the yield curve where supply effects are generally ruled out. Furthermore, this paper argues that central bank supply shocks lead to corporate bond prices deviating from fundamentals. As a consequence, these shocks may, at least temporarily, have a negative effect on market functioning.