Effects of Emerging Market Asset Purchase Program Announcements on Financial Markets During the COVID-19 Pandemic

WP/20/292 Effects of Emerging Market Asset Purchase Program Announcements on Financial Markets During the COVID-19 Pandemic by Can Sever, Rohit Goel, Dimitris Drakopoulos, and Evan Papageorgiou IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. © 2020 International Monetary Fund WP/20/292IMF Working Paper Monetary and Capital Markets Department Effects of Emerging Market Asset Purchase Program Announcements on Financial Markets During the COVID-19 Pandemic* Prepared by Can Sever, Rohit Goel, Dimitris Drakopoulos, and Evan Papageorgiou Authorized for distribution by Fabio Natalucci December 2020Abstract The COVID-19 pandemic led many emerging market central banks to adopt, for the first time, unconventional policies in the form of asset purchase programs. In this study, we analyze the effects of these announcements on domestic financial markets using both event studies and local projections methodology. We find that these asset purchase announcements lowered bond yields, did not lead to a depreciation of domestic currencies, and did not have much effect on equities. While the immediate effect of asset purchases appears positive, further consideration of the risks and longer-term effects of unconventional monetary policies is needed. We highlight the trade-offs involved with the implementation of these measures, and discuss their risks. This working paper adds to the debate on how asset purchase programs should be a regular part of the emerging market policy toolkit. JEL Classification Numbers: E51, E58, F30, G12, G14, G15 Keywords: COVID-19, pandemic, asset purchase program, quantitative easing, bonds, policy announcement, policy spillover, equities, foreign exchange, central banks, emerging markets. Author’s E-Mail Address: Sever: csever@imf.org; Goel: rgoel@imf.org; Drakopoulos: ddrakopoulos@imf.org; and Papageorgiou: epapageorgiou@imf.org. * Some of the results presented in this paper were featured in the IMF’s October 2020 Global Financial Stability Report, Chapter 2. Theauthors are grateful to Tobias Adrian, Fabio Natalucci and Anna Ilyina for their valuable comments and guidance on the project. Magally Bernal provided outstanding administrative and editorial assistance.IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. 2 Contents Page I. INTRODUCTION AND SUMMARY OF FINDINGS ......................................................................... 3 A. Literature ..................................................................................................................................... 5 II. DATA ....................................................................................................................................................... 6 III. METHODOLOGY ................................................................................................................................ 7 IV. RESULTS: EVENT STUDY ANALYSIS ........................................................................................... 8 A. Daily Analysis ............................................................................................................................. 8 B. Intra-Day Analysis ..................................................................................................................... 10 V. RESULTS: REGRESSION ANALYSIS ............................................................................................. 11 A. Baseline Results......................................................................................................................... 11 B. Controlling for the VIX ............................................................................................................. 13 C. Day Fixed Effects ...................................................................................................................... 14 D. Further Checks........................................................................................................................... 14 VI. TRADE-OFFS ...................................................................................................................................... 15 VII. CONCLUSION AND IDEAS FOR FURTHER RESEARCH ....................................................... 16 FIGURES 1. Market Reaction to Domestic APP Announcements .............................................................9 2. Intra-Day Market Reaction to Domestic APP Announcements ..........................................11 3. Domestic APP Announcements and the Fed QE