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

TLDR

The study uses a modern event‑study of Operation Twist to evaluate expected effects of the Fed’s QE2, noting the two policies are similar in magnitude. The authors identify six key announcements during Operation Twist, of which four produced statistically significant market impacts, and compare the policy to QE2. The study finds that Operation Twist lowered long‑term Treasury yields by roughly 15 bp, reduced agency yields by about 13 bp, and cut corporate yields by 2–4 bp, with effects diminishing from Treasuries to private credit.

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.