Abstract
We trace the impact of the European Central Bank’s (ECB) asset purchase program (APP) on the yield curve. Exploiting granular information on sectoral asset holdings and ECB asset purchases, we construct a novel measure of the “free-float of duration risk” borne by arbitrageurs. We include this supply variable in an arbitrage-free term structure model in which central bank purchases reduce the free-float of duration risk and hence compress term premia. We estimate the stock of current and expected future APP holdings to reduce the 10-year yield by almost 1 percentage point. This reduction is persistent, with a half-life of five years.
Authors
- Fabian Eser
- Wolfgang Lemke
- Ken Nyholm
- Sören Radde
- Andreea Liliana Vladu
JEL codes
- C5
- E43
- E52
- E58
- G12