QE in the euro area: Has the PSPP benefited peripheral bonds?

The asset purchase program of the Euro area, active between 2015 and 2018, constitutes an interesting special case of Quantitative Easing (QE) because the ECB's (Public Sector Purchase Program) PSPP program involved the purchase of the bonds of peripheral Euro area governments, which were clearly not riskless. Moreover, these purchases were undertaken by national central banks at their own risk. Intuition suggests, and a simple model confirms, that, ceteris paribus, large purchases of the bonds of the own sovereign by the national central bank should increase the risk for the remaining private bond holders. This might seem incompatible with the observation that risk spreads on peripheral bonds fell when the Euro area's QE was announced. However, the initial fall in risk premia might have been due to the expectation of the bond being effective in lowering risk free rates. When these expectations were disappointed risk premia went back to their initial level. Formal statistical test confirm that indeed risk premia on peripheral bonds did not follow a random walk (contrary to what is assumed in event studies). Nor did the announcements of bond buying change the stochastics of these premia. One should thus not expect the impact effect to have been permanent.