Let's Twist Again: A High-Frequency Event-Study Analysis of Operation Twist and Its Implications for QE2 [with Comments and Discussion]

• Published in: Brookings papers on economic activity Vol. 2011; no. 1; pp. 151 - 207
• Main Authors: SWANSON, ERIC T., REICHLIN, LUCREZIA, WRIGHT, JONATHAN H.
• Format: Journal Article
• Language: English
• Published: Brookings Institution 01.04.2011; Johns Hopkins University Press
• Subjects: Bonds; British petroleum company limited; Corporate bonds; Credit; Economic policy; Economics; Federal reserve system; Financial instruments; Financial securities; Interest rates; Markets; Monetary policy; National treasuries; Securities; Standard deviation; Statistical significance; Treasury; Wall Street; Yield
• ISSN: 0007-2303; 1533-4465; 1533-4465
• DOI: 10.1353/eca.2011.0006

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.