International capital flows at the security level – evidence from the ECB’s asset purchase programme. CEPS ECMI Working Paper no 7 | October 2018

The paper analyses euro area investors’ portfolio rebalancing during the ECB’s Asset Purchase Programme (APP) at the security level. Based on net transactions of domestic and foreign securities, the authors observe euro area sectors’ capital flows into individual securities, cleaned from valuation effects. Their empirical analysis – which accounts for security-level characteristics – shows that euro area investors (in particular investment funds and households) actively rebalanced away from securities targeted under the Public Sector Purchase Programme (PSPP) and other euro-denominated debt securities, towards foreign debt instruments, including ‘closest substitutes’, i.e. certain sovereign debt securities issued by non-euro area advanced countries. This rebalancing was particularly strong during the first six quarters of the programme. The analysis also reveals marked differences across sectors as well as country groups within the euro area, suggesting that quantitative easing has induced heterogeneous portfolio shifts