A Quantitative Analysis of the PEPP's Efficacy

Kaplan Deniz János (2025) A Quantitative Analysis of the PEPP's Efficacy. Nemzetközi Gazdálkodás Kar (2025-)-.

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Absztrakt (kivonat)

This paper investigates the efficacy of the Pandemic Emergency Purchase Programme (PEPP) by the European Central Bank to curb the destabilizing influence of the COVID-19 pandemic on the financial sector, specifically on the finance of bonds, and critically assesses the role of bond rating segmentation. During the onset of the pandemic, which resulted in tremendous financial and economic difficulties during the first quarter of 2020, bond markets, particularly those of companies, were hit by a massive shortage of liquidity, increased credit spreads, and unprecedented shifting towards safe assets by various stakeholders. In reaction to such occurrences, the ECB, under an unprecedented and flexible plan, developed the PEPP worth €750 billion, which later increased to €1.85 trillion. The thesis' most important part is to capitalize on the rating wedge, meaning the difference between the first-best credit rating algorithm issued by the ECB and the more prudent market standard, which often assigns ratings such as the average and lowest. With the wedge, it creates a quasi-experimental design where some bonds are eligible to take part in the PEPP when they are viewed by the market as high-yield bonds. Since the thesis capitalizes on the wedge, it is able to distinguish between bonds which closely exhibit similar credit risk profiles but are not similar when it comes to eligibility and therefore enables it to capture the PEPP effects. A new data set with 1,144 euro-denominated bonds issued by 194 non-financial euro-area corporations has been assembled on Bloomberg, incorporating information on bond yields, bid-ask spreads, tenors, and ratings. Firm-specific variables such as leverage ratios, profitability, Tobins’ Q, and issuance amounts allow assessment of the dynamic interplay between financial decisions after the launch of the PEPP. The analytical technique used, Regression Discontinuity Design, is applied to the market "BBB-“-level and to the more lenient eligibility criteria established by the ECB. Emerging findings support the role of the portfolio rebalancing channel. Although credit spreads increased on the day of the announcement under the influence of high market uncertainty, a strong decrease occurred soon after purchases started on 26 March 2020. The bonds inside the rating wedge and high-yield bonds barely inside investment-grade ratings saw much stronger decreases in credit spreads than bonds already inside the investment-grade category. This suggests that investors opted for more attractive, PEPP-eligible assets when the ECB’s actions alleviated default risk and market uncertainty. In contrast, support for a strong liquidity channel is more dubious, and bid-ask spreads fail to convincingly decrease around the time of the announcement and start of purchases, although the rate of deterioration slows inside the daily liquidity regression equations soon after the start of PEPP. The relevance of bond market issuance varies greatly depending on the credit rating. Qualified companies under PEPP increased their bond issuance after the first quarter of 2020, capitalizing on favorable financial conditions and lower borrowing costs. Other companies, which are not investment-grade, issued fewer bonds, despite the sharp decrease in credit spreads, which is most likely due to remaining difficulties associated with market access, uncertainty, and higher absolute borrowing costs. These findings contradict the assumption that lower credit spreads can enhance high-yield bond issuance and demonstrate the asymmetric benefits associated with central bank purchases of assets. In summary, the thesis places the empirical findings into the wider macroeconomic and societal context between 2020 and 2025. While PEPP has proven to be successful in reducing spreads and enhancing market integration during the crisis, the increase in inflation, a hawkish stance on monetary policy, and the end of reinvestments have changed financial conditions. The long-lasting impact of PEPP is not only driven by a considerable level of assets, but also by the launch of new tools, such as the Transmission Protection Instrument (TPI). The thesis shows that unconventional tools of monetary policy have diverging effects on companies and households, and rating segmentation and portfolio rebalancing are essential drivers during turbulent times.

Intézmény

Budapesti Gazdasági Egyetem

Kar

Nemzetközi Gazdálkodás Kar (2025-)-

Tudományterület/tudományág

NEM RÉSZLETEZETT

Szak

Nemzetközi gazdálkodás

Mű típusa:	diplomadolgozat (NEM RÉSZLETEZETT)
Kulcsszavak:	banking, Covid-19, economics, international finance, quantitative research
SWORD Depositor:	User Archive
Felhasználói azonosító szám (ID):	User Archive
Rekord készítés dátuma:	2026. Júl. 09. 11:50
Utolsó módosítás:	2026. Júl. 09. 11:50

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