How QE changes the nature of sovereign risk

DNB examines the impact of the ECB's quantitative easing (QE) on the sovereign bond risks of Italy, Ireland, Spain and Portugal. First, panel regression model results suggest that QE reduced the impact of volatility on government bond yields by 1 to 2 percentage points. Compared to asset purchases aimed at easing the stance of monetary policy, purchase programmes that support monetary policy transmission by counteracting financial market stress most significantly support the impact of volatility on yield spreads. Second, using a contingent claims model (CCM), the values of the implied put options that QE offers investors as a hedge were found to be significant. The results are intended to provide guidance to policymakers on the use of backstop facilities for government bond markets.

Please find the working paper here.