Portfolio rebalancing and the transmission of large-scale asset purchase programs: Evidence from the Euro area |
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| Institution: | 1. European Central Bank, Frankfurt, Germany;2. Stockholm School of Economics, Swedish House of Finance and CEPR, Sweden;1. Bank of Canada, 234 Wellington St, Ottawa, ON K1A 0G9, Canada;2. Centre for Economic Policy Research, London, United Kingdom;1. Federal Reserve Board, Division of Monetary Affairs, Board of Governors of the Federal Reserve System, USA;2. Robert Day School of Economics and Finance, Claremont McKenna College, USA;1. Yale School of Management and NBER;2. AQR Capital;1. Banco de Portugal, Economics and Research Department, Av, Almirante Reis 71, 1150-015 Lisbon, Portugal;1. Columbia Business School, Hoover Institution, and NBER United States;2. School of Management, Pontificia Universidad Católica de Chile;3. World Bank Research Department, United States |
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| Abstract: | The European Central Bank's large-scale asset purchase program targeted safe assets, but also aimed to impact prices of risky assets. The mechanism for this is the “portfolio rebalancing channel”, where financial institutions’ portfolio decisions impact financial prices more broadly. We examine this mechanism using cross-sectional heterogeneity in how the financial portfolios of different sectors of the European economy were affected around the purchase program. We find evidence of rebalancing. In vulnerable countries, where macroeconomic unbalances and relatively high risk premia remained, we document rebalancing towards riskier securities. In less vulnerable countries, based on granular information for large European banks, we document rebalancing toward bank loans. |
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