Investor behavior around targeted liquidity announcements

We exploit announcements related to targeted longer-term financing operations (TLTROs) as exogenous shocks in investor perceptions to test recent theories on bank funding liquidity (Ahnert et al., 2019; Liu, 2015). We find that banks with high derivative holdings and more exposed to sovereign credit risk respond better to the announcements, consistent with the view that lower funding costs benefit banks with higher asset encumbrance and located in more vulnerable Eurozone countries. The TLTRO announcements also elicit reductions in short positions on bank stocks relative to stocks of non-financial corporations without impairing their market liquidity. Robustness tests rule out that our results are driven by confounding events and anticipation effects. Placebo tests confirm that the TLTRO announcements are driving the estimated price reactions and changes in short positions.