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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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School of Business |
Master's thesis
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en
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44+37
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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)