The effect of ECB currency liquidity lines on the fear of spillovers to Euro area: Evidence from the covid-19 crisis

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Journal Title
Journal ISSN
Volume Title
School of Business | Master's thesis
Date
2024
Department
Taloustieteen laitos
Major/Subject
Mcode
Degree programme
Economics
Language
en
Pages
44+37
Series
Abstract
Central banks use currency liquidity lines to lend their currencies to other central banks in order to ensure stable supply of their currency outside their jurisdiction, thereby preventing negative spillovers to domestic economy. I analyse the effects of the European Central Bank's euro liquidity lines on market's fear for crisis spillovers to euro area equity in a high-frequency difference-in-differences setting. In the COVID-19 market panic, the ECB liquidity line announcements are associated with the 40-110 basis points reduction of the market's expectation for at least 20% losses over the one to three months horizon. However, the differential effect between the euro area countries with high and low trade and financial exposures to the countries receiving the euro provision is actually positive, hinting of negative information effect. (JEL E44, E58, F33, G15)
Description
Thesis advisor
Kitti, Mitri
Keywords
market fear, central bank liquidity lines, swap and repo lines, liquidity facilities
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