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Risk reallocation under Central Bank’s large-scale asset purchases
Alberto López Martín
Crises have some common features: increases in risk premia, decrease of real risk-less interest rates, and flight to quality assets, among others. This paper studies the effects of large-scale asset purchases on the market price of risk and the risk-free rate. We observe how, when the central bank buys risky assets using risk-less debt, there is a reduction of risk-taking in the economy, as the risk is transferred to non-market participants. Large-scale asset purchases by the central bank reduce the exposure of intermediaries’ balance sheets to capital shocks, leading to a reduction in the risk premium and an increase in the risk-free rate.