The Impact of the HYG ETF on the Liquidity of the Markets for the Underlying High-Yield Bonds
39 Pages Posted: 18 Nov 2021
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: Suggested Citation