Event studies can only measure the ‘impact’ of quantitative easing (QE) policies on the event day. But is it permanent? Under the usual assumption of the efficient market hypothesis (EMH) that bond returns follow a random walk process, all ‘surprises’ induced by announcements of central bank bond buying should be permanent.

The idea of stock prices following a random walk is closely connected to that of the EMH. The prior is that investors react instantaneously to any informational advantages they have, thus eliminating any remaining profit opportunities. Hence, asset prices always fully reflect the available information. Moreover, no profit can be made from information-based trading. This leads to a random walk where the more efficient the market is, the more random the sequence of price changes turns out to be.

Event studies use the random walk hypothesis in two ways: 1) Announcements rather than actual implementation of the bond buying constitute the decisive moments when market prices move since investors will anticipate the impact of the bond buying. 2) The announcement effect is permanent. The random walk hypothesis implies that the movement of yields on the day of the announcement constitute a permanent innovation to the future time path of yields. The random walk hypothesis is thus essential to establish a permanent effect of QE.

The implicit reasoning of event studies is thus that the macroeconomic benefits of the Public Sector Purchase Program (PSPP) can be calculated by using a standard macroeconomic model and lowering the interest rate by the announcement effect for the entire period since the announcement.

In this paper we therefore test the random walk hypothesis for a couple of yields and yield spreads of Euro area member countries’ sovereign bonds (especially Spanish and Italian bonds).