PEPP Talk: The Impact of the ECB's Pandemic Emergency Purchase Programme on the Corporate Bond Market
Abstract: Purpose: This thesis aims to evaluate whether the ECB’s Pandemic Emergency Purchase Programme (PEPP) cushioned the Covid-19 crisis’ impact on the Euro area’s corporate bond market and relieved borrowing conditions. Methodology: The methodology is based upon unbalanced panel data and difference-in-differences regressions with firm-clustered standard errors. The model controls for industry and country fixed effects and further covariates. In another step, treatment and control group matching is improved with propensity score matching, and robustness tests are conducted. Theoretical Perspectives: Theoretical deductions are based on channels through which quantitative easing programmes influence corporate credit spreads: efficient market hypothesis, signalling channel, default risk channel, duration risk channel, liquidity channel and portfolio rebalancing channel. Empirical Foundation: The sample consists of around 2,200 investment-grade corporate bonds, for which data on all the PEPP’s eligibility criteria are publicly available. The bonds were issued by 230 non-financial firms incorporated in the Euro area. The dependent variable is credit spread throughout all specifications, constructed by matching corporate bond yields with German Bond yields of similar maturity. Conclusion: Among corporate bonds eligible under the PEPP, we find an easing of financing conditions with respect to non-eligible bonds. These effects are statistically significant but weak in economic terms. Moreover, the PEPP’s impact is more pronounced for short-term maturities. We do not find evidence that the start of the purchases under the PEPP impacted eligible and non-eligible bonds differently. We find support for the workings of the signalling, duration risk and portfolio rebalancing channels, as well as for the efficient market hypothesis and a segmented corporate bond market among maturities.
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