Index Driven Price Pressure in Corporate Bonds

38 Pages Posted: 16 Mar 2012

See all articles by Jens Dick-Nielsen

Jens Dick-Nielsen

Copenhagen Business School - Department of Finance

Date Written: March 15, 2012

Abstract

Inclusion and exclusion of bonds from major indices are information-free, monthly events. At these events, liquidity providers get a significant abnormal return by trading against index trackers. The return is highest for bonds that are excluded because of a recent downgrade with a one-day return of 356.2 bps (T-stat 2.82). Liquidity provision at exclusions is more profitable than at inclusions because index trackers follow a sampling strategy and returns also increase when liquidity provision becomes more expensive. Furthermore, price reactions following index changes are reversed shortly after the event date which indicate temporary price pressure.

Keywords: Short-term reversals, Lehman/Barclay bond index, Liquidity Provision, Illiquid Market, TRACE

JEL Classification: C23, G12

Suggested Citation

Dick-Nielsen, Jens, Index Driven Price Pressure in Corporate Bonds (March 15, 2012). Available at SSRN: https://ssrn.com/abstract=2022956 or http://dx.doi.org/10.2139/ssrn.2022956

Jens Dick-Nielsen (Contact Author)

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

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