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BPEA Article

Let’s Twist Again: A High-Frequency Event-Study Analysis of Operation Twist and Its Implications for QE2

Abstract

This paper undertakes a modern event-study analysis of
Operation Twist and uses its estimated effects to assess what should be expected
for the recent policy of quantitative easing by the Federal Reserve, dubbed
“QE2.” The paper first shows that Operation Twist and QE2 are similar in
magnitude. It then identifies six significant, discrete announcements in the
course of Operation Twist that could have had a major effect on financial markets
and shows that four did have statistically significant effects. The cumulative
effect of these six announcements on longer-term Treasury yields is highly
statistically significant but moderate, amounting to about 15 basis points (bp).
This estimate is consistent both with time-series analysis undertaken not long
after the event and with the lower end of empirical estimates of Treasury supply
effects in the literature. The effects of Operation Twist on long-term agency
and corporate bond yields are also statistically significant but smaller, about
13 bp for agency securities and 2 to 4 bp for corporates. Thus, the effects of
Operation Twist seem to diminish substantially as one moves from Treasury
securities toward private sector credit instruments.

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