The Effects of Large Scale Asset Purchases on Corporate Bond Yields: Drivers & Channels

This work builds on the empirical literature using event studies to analyze the effects of the announcements of Large Scale Asset Purchase (LSAP) programs by the Federal Reserve and the European Central Bank with a special focus on their pass-through to corporate bond yields. Specifically, it attempts to answer the question raised by the existing literature which characteristics of the LSAP programs in terms of the composition of assets purchased and the financial market environment prevalent around the announcements drive their effects on corporate yields. For the Federal Reserve’s LSAPs, I find that most of the pass-through from LSAPs to risky corporate debt takes place when the central bank purchases private assets in highly distressed financial markets while neither of these two factors can explain that pass-through by itself, whereas the purchases of assets with private default risk components by the ECB seem to have an effect independent of financial conditions, potentially due to the greater substitutability of the assets purchased by the ECB to corporate bonds. The pass-through of LSAPs to corporate bonds is further decomposed into its individual transmission channels. Most of the pass-through seems to be coming from a signaling and a credit default risk channel, which are affected by private asset purchases and financial conditions in opposite directions. ∗ I am extremely grateful to my adviser Professor Michael Woodford for his extensive guidance and advice on this thesis. I further would like to thank Professor Bernard Salanié as well as the other participants at the senior honors seminar for many useful discussions. I have to specifically point out Raghav Bansal for countless fruitful conversations and Jeff Gortmaker for his invaluable programming help. Lastly, I want to thank Professor Sally Davidson for her support and Professor Stephanie SchmittGrohé for her comments.