The Impact of Innovation: Evidence from Corporate Bond ETFs

58 Pages Posted: 12 Dec 2014 Last revised: 28 Dec 2016

See all articles by Caitlin D Dannhauser

Caitlin D Dannhauser

Villanova University - Department of Finance

Date Written: July 28, 2016

Abstract

Using distinct features of corporate bond ETFs, financial innovation is found to have a significant and long‐term positive valuation impact on the systemically important underlying. A one standard deviation increase in ETF ownership reduces high yield and investment grade bond spreads by 20.3 and 9.2 basis points, respectively, implying an average monthly price increase of 1.03% and 0.75%. Two novel quasi‐natural experiments exploit exogenous changes in ETF eligibility to confirm the effect. Examining theoretical explanations for the effect, ETFs are found to decrease liquidity trader participation, increase institutional ownership, and insignificantly or negatively impact the liquidity of individual bonds.

Keywords: ETF, Corporate Bonds, Liquidity

JEL Classification: G01, G12, G14

Suggested Citation

Dannhauser, Caitlin D, The Impact of Innovation: Evidence from Corporate Bond ETFs (July 28, 2016). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2536418 or http://dx.doi.org/10.2139/ssrn.2536418

Caitlin D Dannhauser (Contact Author)

Villanova University - Department of Finance ( email )

United States
610-519-4348 (Phone)

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