Market Accessibility, Corporate Bond ETFs, and Liquidity

70 Pages Posted: 11 Dec 2017

See all articles by Jayoung Nam

Jayoung Nam

Southern Methodist University (SMU) - Edwin L. Cox School of Business; Indiana University - Kelley School of Business

Date Written: November 30, 2017

Abstract

I find that market accessibility ex ante plays an important role in how the underlying assets' liquidity changes when a basket security is introduced. First, using a multi-market version of the Kyle model, I show that the less (more) accessible the underlying market is, the more its liquidity improves (deteriorates) when basket trading becomes available. Second, I empirically test these predictions using corporate bonds before and after the introduction of ETFs. Consistent with the model, liquidity improvement is larger for highly arbitraged, low-volume, high-yield, and long-term bonds and for 144A bonds to which retail investor access is not permitted.

Keywords: Market Accessibility, ETFs, Corporate Bonds, Liquidity

JEL Classification: G14, G19

Suggested Citation

Nam, Jayoung, Market Accessibility, Corporate Bond ETFs, and Liquidity (November 30, 2017). Kelley School of Business Research Paper No. 18-1. Available at SSRN: https://ssrn.com/abstract=3083257 or http://dx.doi.org/10.2139/ssrn.3083257

Jayoung Nam (Contact Author)

Southern Methodist University (SMU) - Edwin L. Cox School of Business ( email )

P.O. Box 750333
Dallas, TX 75275-0333
United States

Indiana University - Kelley School of Business ( email )

1309 East Tenth Street
Bloomington, IN 47405-1701
United States

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