Template-Type: ReDIF-Paper 1.0
Author-Name: Changhyun Lee
Author-Name-First: Changhyun
Author-Name-Last: Lee
Author-Workplace-Name: Department of Economics, University of California Davis
Title: The outside option channel of central bank asset purchase programs: A tale of two crises
Abstract: I suggest a new channel through which central bank asset purchase programs could have effects
 on asset prices: The outside option channel. After the global financial crisis, central banks have
 widened the variety of assets they can purchase. Secondary markets for the majority of the
 newly targeted assets are characterized by the OTC market structure with matching frictions
 and bargaining features. In bargaining, the central bank’s asset purchase announcement could
 affect the outside option value of the asset seller by providing one more option of selling the
 asset to the central bank to the seller. The effect of the outside option channel materializes even
 without actual purchases by the central bank since once the asset seller is matched with the
 buyer, she would exploit the announcement to require a higher price in the bargaining but not
 actually sell the asset to the central bank. I show how the outside option channel could work
 through a two-period model and discuss its empirical relevance by comparing two episodes of
 the Fed’s asset purchases during the global financial crisis and the COVID crisis.
Length: 32
File-URL: https://repec.dss.ucdavis.edu/files/usjfijsd4vr7pyiwjvwpndli7knc/Outside_option_channel.pdf
File-Format: application/pdf
Number: 363
Classification-JEL: E50, E58, G12
KeyWords: Unconventional monetary policy, OTC markets, Asset pricing
Creation-Date: 20240608
Handle: RePEc:cda:wpaper:363