The Portfolio Rebalancing Effects of the ECB's Asset Purchase Programme

We explore the transmission of the ECB's public sector asset purchase programme (PSPP) via the portfolio rebalancing of investment funds and their investors. Evidence for this channel would validate several theoretical propositions and provide insights into market perceptions of intervention effects. Using dynamic panel methods, we find that PSPP-holding funds rebalance towards bonds issued by non-EA deposit taking corporations. Other bond and mixed funds also tend to rebalance towards non-EA issued NFC and government bonds. There is some evidence of rebalancing into longer-term maturities but none towards equities. These effects mainly become significant after the scaling-up of the programme. This pattern of rebalancing implies a heavy reliance on weakness of the euro to generate inflation and it reflects a continued reluctance to invest in the growth prospects of EA banks and corporates