Investor Heterogeneity and Large-Scale Asset Purchases
with Johannes Breckenfelder
Large-Scale Asset Purchases can impact the price of securities directly, when securities are targeted by the central bank, or indirectly through portfolio re-balancing of private investors. We show that investor heterogeneity is pivotal for both direct and indirect effects of central bank purchases. Using security-level holdings data for the euro area, we find that the direct effects of central bank purchases by the European Central Bank on prices are smaller for securities predominantly held by more price elastic investors. When sorting securities on how price elastic is their investor base, we find that the direct effects of central bank purchases for a security at the 90th percentile of the investor elasticity distribution are two-thirds as large as for a security at the 10th percentile. To gauge the indirect effects, we construct a shift-share instrument to measure mutual funds’ quasi-exogenous exposure to central bank purchases. The instrument is based on funds’ holdings of securities eligible for purchases before central bank purchases were announced and realized purchases. On average, a mutual fund sells eligible securities worth 0.5% of its total portfolio holdings. However, there is substantial heterogeneity among funds, with those holding portfolios more exposed to central bank purchases re-balancing more towards ineligible securities. The price of ineligible securities, held by more exposed funds, increases compared to those held by less exposed funds.