In their paper titled 'Quantitative Easing and the Pricing of EMU Sovereign Debt', which appeared in the June 2017 edition of the distinguished journal Quarterly Review of Economics and Finance, Wagner and Kinateder analyse the effects of Mario Draghi's unconventional monetary policy on sovereign bonds in the Eurozone. The authors show that the ECB's Quantitative Easing measures lead to a sharp short-term reduction in Eurozone sovereign bond yield spreads vis-à-vis German government bonds.
From this key finding, it can be deduced that any sudden inability on the part of the ECB to sustain its current course, forcing it to abandon its Quantitative Easing approach and leading to a massive reduction in the ECB balance sheet, will leave investors faced with significant price reductions of sovereign bonds, particularly in the peripheral Eurozone countries. 'Since such unconventional monetary policies can have unintended long-term consequences, we cannot say, based on our findings, that there will be no detrimental effects on long-term financial market stability', says Professor Wagner.
Furthermore, the authors show that the occasionally very high yield spreads during the European sovereign debt crisis could be partly explained by liquidity bottlenecks on the country and market level. The comparison with pre-crisis levels illustrates the occasionally strong underestimation of the systematic part of risk premiums for sovereign bonds in the peripheral countries. Investors' awareness only shifted when problems with individual state budgets came to light, leading to a sharp increase in risk premiums.
About the authors
Professor Wagner holds the Chair of Finance and Financial Control at the University of Passau. After finishing his PhD in Finance at Augsburg and research stays in Berkeley and Stanford as well as at TU Dresden, he was granted his postdoctoral habilitation qualification at TU Munich and took up his professorial post at the University of Passau. Dr Harald Kinateder is an assistant professor and has worked for the Chair of Finance and Financial Control since 2007. The research interests of the Chair are in market and credit risk management, among others.