Flow effects of large-scale asset purchases

- We examine “flow effects” that occur at the time (and as a result) of LSAP transactions.
- Persistent effects of LSAP announcements, known as “stock effects,” are not studied.
- We consider flow effects in both prices and liquidity of Treasury securities.
- We find price effects in early LSAP programs that dissipate in future programs.
- We detect no evidence of liquidity disruptions as a result of Federal Reserve purchases.

How large-scale asset purchase (LSAP) programs affect financial markets is an important question for policy makers that face the zero lower bound. While so-called “stock effects”-that is, persistent shifts in asset prices observed as the result of an LSAP program-are relatively well documented in the literature, there has been little study of “flow effects” that may occur at the time of LSAP transactions. Using security-level transaction data related to four distinct programs over a period of roughly four years, we test for the presence of flow effects in both price and liquidity of Treasury securities. We show that flow effects in security prices were present during early LSAPs by the Federal Reserve, but they were of little economic significance. Alternatively, we find no evidence for systematic liquidity flow effects in any of the LSAP programs.