We show that during the period of the Public Sector Purchase Program (PSPP) implemented by the Eurosystem, the prices of German sovereign bonds targeted by the PSPP increase predictably towards month-end and drop subsequently. We propose a sequential search-bargaining model that captures salient features of the implementation of the PSPP such as the commitment to buy within an explicit time horizon. The model can explain the predictable pattern as a result of imperfect competition between dealers that are counterparties to the Eurosystem. Motivated

by the model's predictions, we show that the price pattern is more pronounced (a) for bonds that are targeted by the PSPP, (b) for monthly windows where the Eurosystem has fewer counterparties, and (c) for monthly windows where the Eurosystem targets a larger amount of purchases. We discuss the implications of our analysis for future purchase programs.

It is common practice in finance to use difference-in-differences analysis to examine fixed-income pricing data. This paper uses simulations to show that this method applied to pricing variables that exhibit a term structure, such as yields or credit spreads, systematically produces false and mismeasured treatment effects. This holds true even if the treatment is randomly assigned. False and mismeasured treatment effects result from heterogeneous effects in different parts of the term structure in combination with unequal distributions of residual maturities in the treated and control bond samples. Neither bond fixed effects nor explicit yield-curve control in the specification resolve the issues.

We develop a conditional factor model for the term structure of Treasury bonds, which unifies non-parametric curve estimation with cross-sectional asset pricing. Our factors are investable portfolios and estimated with cross-sectional ridge regressions. They correspond to the optimal non-parametric basis functions that span the discount curve and are based on economic first principles. Cash flows are covariances, which fully explain the factor exposure of coupon bonds. Empirically, we show that four factors explain the discount bond excess return curve and term structure premium, which depends on the market complexity measured by the time-varying importance of higher order factors. The fourth term structure factor capturing complex shapes of the term structure premium is a hedge for bad economic times and pays off during recessions.