Seminar: The impact of QE on liquidity: Evidence from the UK Corporate Bond Purchase Scheme

In August 2016 the Bank of England's Monetary Policy Committee announced a Corporate Bond Purchase Scheme (CBPS) to purchase up to \pounds 10bn of sterling corporate bonds. What was the impact of these purchases on liquidity in the corporate bond market? To tackle this question, we create a novel dataset that combines transaction-level data from the corporate bond market with bid-level data from the CBPS auctions. Identifying the impact of central bank asset purchases on liquidity is plagued with endogeneity but our granular data offer novel ways to reduce the magnitude of any reverse causality. In particular, by constructing proxies for auction participants’ supply of bonds and the Bank of England's demand, we can control for the potential impact of liquidity on purchases. Across a wide range of liquidity measures, we find that the CBPS purchases improved the liquidity of purchased bonds in the week following the purchase. Evidence on whether these effects were persistent is more mixed, but we do find evidence that the liquidity of sterling corporate bonds in general improved relative to euro-denominated bonds over the CBPS purchase period. This is consistent with portfolio-rebalancing effects contributing to a wider improvement in liquidity.