Long-Term Liquidity Effects of Large-Scale Asset Purchase Programs : Evidence from the Euro Covered Bond Market

This study documents that asset purchase programs can dampen market liquidity. It uses a unique dataset of global euro-denominated covered bonds, which quantitative easing has affected to a larger extent than other markets. While the start of the central bank purchases amplifies liquidity for several weeks, liquidity declines after half a year. The drop relates to the central bank's bond inventory. It is partly mitigated by a reduction in buying, but liquidity does not fully recover. The contemporaneous flow effect of purchase program buying is initially positive, but becomes negative when liquidity deteriorates