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Central bank asset purchases and auction cycles revisited: new evidence from the euro area

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Friday, April 19, 2024

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Working Paper Series

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Working Paper Series
Federico Maria Ferrara
Central bank asset purchases
and auction cycles revisited:
new evidence from the euro area

No 2927

Disclaimer: This paper should not be reported as representing the views of the European Central Bank
(ECB).
Abstract
This study provides new evidence on the relationship between unconventional monetary
policy and auction cycles in the euro area.
The findings indicate that Eurosystem?s asset purchase flows mitigate
yield cycles during auction periods and counteract the amplification impact of market volatility.
The dampening effect of central bank asset purchases on auction cycles is more sizeable and
precisely estimated for purchases of securities with medium-term maturities and in jurisdictions
with relatively lower credit ratings.
On the other hand, central banks may influence price dynamics in these markets, most notably
through their asset purchase programmes.
If so, do central bank asset purchases
affect bond yield movements around auction dates?
Auction cycles are present when secondary market yields rise in
anticipation of a debt auction and fall thereafter, generating an inverted V-shaped pattern around auction
dates.
ECB Working Paper Series No 2927
3

1

Introduction

The impact of central bank asset purchases on government bond markets is a focal point of economic and
financial research.
If so,
do central bank asset purchases shape yield sensitivity around auction dates?
The paper provides new evidence on the effects of Eurosystem?s asset purchases on secondary market
yields around public debt auction dates.
The analysis builds on previous research based on aggregate data
on central bank asset purchases and a shorter analysis period (van Spronsen and Beetsma 2022).
Using
granular data on Eurosystem?s asset purchases offers an opportunity to shed light on the mechanisms linking
unconventional monetary policy and auction cycles.
Given this legal constraint, the study
hypothesises that the effect of asset purchases on 10-year auction cycles is mostly indirect, and goes via price
spillovers generated by purchases of securities outside the 10-year maturity space.
Taken together, these results provide new evidence about auction cycles in Europe and contribute to a
larger literature on the flow effects of central bank asset purchases on bond markets.
Section 4 offers descriptive evidence about auction cycles in the euro area.
Auction cycles are defined by the presence of an inverted V-shaped pattern in secondary market yields
around primary auctions.
That is, government bond yields rise in the run-up to the date of the auction and
fall back to their original level after the auction.
Their limited risk-bearing capacities and inventory management operations are
seen as key mechanisms driving auction cycles (Beetsma et al.
ECB Working Paper Series No 2927
7

Second, central bank asset purchases can alleviate the cycle by (partly) absorbing the additional supply
of substitutable instruments in the secondary market (van Spronsen and Beetsma 2022).
This expectation is
supported by several analyses on the price effects of central bank bond purchases (D?Amico and King 2013;
Arrata and Nguyen 2017; De Santis and Holm-Hadulla 2020).
Empirically, previous research has provided evidence of auction cycles taking place across different jurisdictions.
(2016) detect auction cycles for government debt in Italy, but not in Germany, during the European
sovereign debt crisis.
Research on the impact of central bank asset purchases on yield cycles around auctions is still limited.
Their paper provides evidence
that Eurosystem?s asset purchases reduce the presence of auction cycles for euro area government debt.
Nonetheless, several questions remain open about auction cycles and unconventional monetary policy
in the euro area.
Therefore, they
provide only a partial picture of auction cycles and central bank asset purchases in Europe.
The use of granular data on central bank asset purchases is especially important in light of the modalities
of monetary policy implementation of the Eurosystem.
Altogether, these elements motivate further investigation of the relationship between central bank asset
purchases and auction cycles in the euro area.
Taken together, these results confirm that Eurosystem?s asset purchases mitigate yield cycles during auction periods and counteract the amplification impact of market volatility.
The findings confirm that the flow
effects of central bank purchases on yield movements around auction dates are driven by lower-rated countries.
Additional analyses provide evidence for an indirect effect of purchases on auction cycles and highlight
the presence of substantial heterogeneity across jurisdictions and purchase programmes.
Flow Effects of Central Bank Asset Purchases on Sovereign Bond
Prices: Evidence from a Natural Experiment.
Federico Maria Ferrara
European Central Bank, Frankfurt am Main, Germany; email: [email protected]
? European Central Bank, 2024
Postal address 60640 Frankfurt am Main, Germany
Telephone
+49 69 1344 0
Website
www.ecb.europa.eu
All rights reserved.

Monetary asmmetries without (and with) price stickiness

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Friday, April 19, 2024

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A new measure of firm-level competition: an application to euro area banks

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Thursday, April 18, 2024

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Abstract

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Abstract
This paper extends Boone (2008) by introducing a competition measure at the individual
firm level rather than for an entire market segment.
We apply this extended Boone indicator to individual bank-level competition
in the loan market in the four largest euro area countries and Austria.
Our new measure of firm-level competition enriches and complements
other competition measures and provides a promising starting point for future market
power analyses.
The only measure among non-structural measures that is based on the
concept of competition as a process of rivalry is the Boone (2008) indicator.
We introduce
a new performance measure of competition by extending the Boone indicator to the
individual firm level.
Introduction
The ability to reliably measure competition is valuable to researchers, analysts, and
policymakers, especially antitrust authorities, financial supervisors, and central banks.
One broad
category of indicators often used to measure competition are structural competition
measures, such as static concentration measures, and dynamic measures, e.g., entry and
exit rates.
Out of these measures, the only measure based on the
concept of competition as a process of rivalry is the Boone indicator.
This study introduces a new performance measure of competition by extending the
Boone indicator to the individual firm level.
It thus measures the
increase in profits in percent of one percentage point increase in efficiency, with marginal
costs as measure of efficiency.
We extend the theoretical
underpinning of the measurement of competition for the entire market of Boone (2008) by
a new measure of individual firm-level competition.
A concern of the literature is the gap
between the practical application and the theoretical framework of Boone (2008).
We introduce within the same theoretical
framework a new measure of competition on firm level, the MRP.
Our new
measure significantly augments the antitrust evaluative framework by shedding light on
whether a merger results in a less competitive market.
Our novel indicator focuses on
firms? incentives to enhance their relative efficiency, as manifested in the elasticity
between relative profits and efficiency.
However, an inefficient firm that is foreclosed could be more
competitive than the larger efficient firm that relies on its scale economies.
Our new metric of competition unveils
banks? ability to influence their profitability in the short term by cutting costs relative to
their peers.
The new MRP indicator provides the ability to assess the impact
of individual banks? competitiveness on their interest rate-setting behaviour in loan
markets.
Incorporating this information promises a more refined understanding of the impact and
timing of monetary policy rates changes on the real economy.
Section 3 introduces within the Boone
(2008) theoretical framework our new measure of individual firm-level competition,
including the interpretation of the MRP.
Section 4 provides an application of our new
ECB Working Paper Series No 2925
6

individual firm-level competition measure to the loan market.
The StructureConduct-Performance paradigm (SCP) provides a traditional framework in the field of
industrial organization for analysing competition behaviour in markets.
Concentrated
markets ease the possibilities to collude implicitly or explicitly and therefore concentrated
markets result in higher prices and profits.
For example, a tougher competition
setup may lead to a reallocation of market shares, potentially forcing some firms to exit
the market.
This approach gives firms? strategic behaviour
central stage and focuses on the strategic interaction on prices and quantities, known as
conjectural variation.
Another measure from
this strand of literature is the H-statistic developed by Panzar and Rosse (1987).
The only competition measure from this performance literature where competition is the
outcome from a process of rivalry is the Boone indicator.
A continuous and monotonically increasing relationship exists between
RPD and the level of competition if firms are ranked by decreasing efficiency.
(2013) compare the Boone indicator with the price-cost margin
and conclude that the profit elasticity is a more reliable measure of competition.
The high
elasticity of profits to efficiency unequivocally indicates that the high market shares and
therefore high profits are due to high efficiency.
A firm that quickly passes changes to the input prices is seen as a price
taker with little market power.
Indicators of competition tend to measure different phenomenon and may provide
conflicting messages, as reported for European banking by Carbo et al.
Application 2: Test the ?quiet life? and related market structure hypotheses using the
MRP as competition or market structure measure.
Data
Our application to individual bank-level competition in the euro area loan market uses
balance sheet and income statement data from the Moody?s Analytics BankFocus for the
calendar years 2013-2020.
As such, most publications
on competition in the euro area includes the largest four member states.
Due to these restrictions the database was reduced to an unbalanced panel of up to 1862
banks (depending on the year) from five euro area countries.
Application 1: Measure bank competition using MRP
Looking at the distribution of the MRP for individual banks (Fig.
A similar finding for the four largest euro area countries as a group is
reported in Carbo et al.
Application 2: Test of market structure hypotheses using MRP
Our new measure of individual-bank competition can be used to test market structure
theories.
Euro area banks? market power,
lending channel and stability: the effects of negative policy rates, European Central Bank
Working Paper, 2790 (February).
A
new approach to measuring competition in the loan markets of the euro area, Applied
Economics, 43 (23), 3155?3167.
Impact of bank competition on the interest rate pass-through in the euro area, Applied
Economics, 45 (11), 1359?1380.

Central bank digital currency and monetary policy implementation

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Thursday, April 18, 2024

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Transactional demand for central bank digital currency

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Thursday, April 18, 2024

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Feedback on the input provided by the European Parliament as part of its resolution on the ECB’s Annual Report 2022

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Thursday, April 18, 2024

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Beyond managing related risks, the financial sector can also contribute to the transition toward a net-zero economy.

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Beyond managing related risks, the financial sector can also contribute to the transition toward a net-zero economy.
Our work aims to enhance data transparency in climate change analysis, while informing monetary policy, financial stability and banking supervision.
The indicators we have developed focus on the euro area financial sector and are built from harmonised granular datasets.

EQS-News: Negative market environment strongly impacts 2023 earnings – implementation of performance program exceeds plan

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Wednesday, April 10, 2024

CDP, Organization, CAPEX, Growth, Environment, Lenzing AG, Clothing, EU Ecolabel, IMF, Hygiene, Depreciation, Marketing, Cryptocurrency

The largely absent recovery in the textile and clothing industry had a negative impact across the entire sector.

Key Points:

The largely absent recovery in the textile and clothing industry had a negative impact across the entire sector.
Prices for wood-based specialty fibers were also down slightly due to weaker demand, particularly from brands and retailers, as well as additional market capacity.
Earnings before interest, tax, depreciation and amortization (EBITDA) rose by 25.4 percent year-on-year to reach EUR 303.3 mn in the reporting year.
Earnings after tax amounted to minus EUR 593 mn (compared with minus EUR 37.2 mn in 2022) and earnings per share to minus EUR 20.02 (compared with minus EUR 2.75 in 2022).

Over 52 Million Myeloma Warriors Reached, Creating Ripples Across the Globe for #MyelomaACTIONMonth

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Thursday, April 4, 2024

“From South Korea to Portugal, India to Poland, all myeloma communities spoke as one voice once more for Myeloma Action Month!

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“From South Korea to Portugal, India to Poland, all myeloma communities spoke as one voice once more for Myeloma Action Month!
Beyond the numbers, this year’s #MyelomaACTIONMonth global campaign created ripples through the power of each myeloma story shared.
These ripples converged to create a mighty wave of awareness for multiple myeloma across the globe.
Sessions included Myeloma 101 & Understanding Your Labs, Financial Considerations in Myeloma, and Symptom Management and Living Well with Myeloma and much more.

Lifelong Philanthropist and 17-year Myeloma Survivor John O’Dwyer Elected to the International Myeloma Foundation’s Board of Directors

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Thursday, March 14, 2024

STUDIO CITY, Calif. , March 14, 2024 (GLOBE NEWSWIRE) -- The International Myeloma Foundation (IMF) is thrilled to welcome lifelong philanthropist and 17-year myeloma survivor John O’Dwyer to the IMF Board.

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STUDIO CITY, Calif. , March 14, 2024 (GLOBE NEWSWIRE) -- The International Myeloma Foundation (IMF) is thrilled to welcome lifelong philanthropist and 17-year myeloma survivor John O’Dwyer to the IMF Board.
Prior to his recent election, John served on the IMF Board from 2010-2016 and made many significant contributions to advance the mission and goals of the IMF.
A cure is possible, but it is not free!”
“I am thrilled to have John back on the IMF Board.
“I am very excited to welcome board member John O’Dwyer back to the IMF Board.

Telestream Introduces AI-Powered Tools for Rapid Content Delivery at NAB Show 2024

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Tuesday, March 19, 2024

This new flexibility not only accelerates content delivery but also empowers companies to capture and monetize additional content, unhindered by the physical constraints of onsite infrastructure.

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This new flexibility not only accelerates content delivery but also empowers companies to capture and monetize additional content, unhindered by the physical constraints of onsite infrastructure.
In today's multi-platform media environment, the rapid delivery of high-quality content across various platforms is a necessity.
Intelligent Quality Control (QC): Telestream's AI-driven QC tools automate the process of ensuring consistent content quality across large volumes of media.
For more information about Telestream products and services at NAB Show 2024, please visit: www.telestream.net/nab .