The Impact of the HYG ETF on the Liquidity of the Markets for the Underlying High-Yield Bonds

39 Pages Posted: 18 Nov 2021

See all articles by John D. Finnerty

John D. Finnerty

Fordham University - Finance Area; Finnerty Economic Consulting LLC

Natalia Reisel

Fordham University

Date Written: July 1, 2021

Abstract

We examine a link between a bond ETF and the underlying bond market liquidity. Using daily creation and redemption data for the HYG ETF, we find that including a bond on the HYG ETF’s creation or redemption lists has a favorable impact on the bond’s liquidity. This impact is stronger on stress days for redemptions but not for creations. Our results suggest that ETF mispricing arbitrage explains the improvement in high-yield bond liquidity. However, consistent with Pan and Zeng (2019), we also find evidence that transaction costs and inventory management limit the ETF arbitrage especially for creations.

Keywords: bond ETF, bond liquidity, mispricing arbitrage

JEL Classification: G20, G23

Suggested Citation

Finnerty, John D. and Finnerty, John D. and Reisel, Natalia, The Impact of the HYG ETF on the Liquidity of the Markets for the Underlying High-Yield Bonds (July 1, 2021). Available at SSRN: https://ssrn.com/abstract=3950588 or http://dx.doi.org/10.2139/ssrn.3950588

John D. Finnerty (Contact Author)

Fordham University - Finance Area ( email )

113 West 60th Street
New York, NY 10023
United States
2125991640 (Phone)
2125991242 (Fax)

HOME PAGE: http://www.finnecon.com

Finnerty Economic Consulting LLC ( email )

60 East 42nd Street
Suite 2910
New York, NY 10165
United States
2125991640 (Phone)
2125991242 (Fax)

HOME PAGE: http://www.finnecon.com

Natalia Reisel

Fordham University ( email )

45 Columbus Ave
New York, NY 10023
United States

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