Central Bank–Driven Mispricing (with Marti G. Subrahmanyam, Davide Tomio and Jun Uno)
Abstract:
We use millisecond-stamped data from t
he Mercato dei Titoli di Stato (MTS) cash Treasury bond and the Eurex Treas
ury bond futures markets to show that bond purchases, undertaken under the
Public Sector Purchase Program by the European Central Bank (ECB), decouple
d the close link between the cash bond and futures markets, thus driving a
wedge between their prices. This result is robust even after controlling fo
r market liquidity in both the markets and overall funding liquidity. In fa
ct, although the ECB intervened only in the cash bond market, the futures m
arket was also affected, as the central bank’s intervention depleted market
liquidity in both markets and, thus, increasing liquidity commonality. How
ever, the impact of this dislocation on the volume of trade is ambiguous. T
here is a slight reduction in the volume of trade in the cash bond market,
as represented by the MTS, accompanied by a large and significant increase
in the volume of trade in the corresponding futures market.