Market Accessibility, Corporate Bond ETFs, and Liquidity

96 Pages Posted: 11 Dec 2017 Last revised: 6 Feb 2023

See all articles by Craig W. Holden

Craig W. Holden

Indiana University - Kelley School of Business - Department of Finance

Jayoung Nam

Southern Methodist University (SMU) - Finance Department

Date Written: November 30, 2017

Abstract

We develop a stylized model that generates the following empirical predictions: the less (more) accessible the underlying market is ex ante, the more its liquidity improves (deteriorates) when basket trading becomes available. We empirically test these predictions using corporate bonds before and after the introduction of ETFs. Consistent with the model's prediction, liquidity improvement is larger for highly arbitraged, low-volume, and high-yield bonds, and for 144A bonds to which retail investor access is prohibited by law. Our paper leads to a more nuanced understanding of the impact of basket security introduction than previous research suggested.

Keywords: Market Accessibility, ETFs, Corporate Bonds, Liquidity

JEL Classification: G14, G19

Suggested Citation

Holden, Craig W. and 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

Craig W. Holden

Indiana University - Kelley School of Business - Department of Finance ( email )

Kelley School of Business
1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3383 (Phone)
812-855-5875 (Fax)

HOME PAGE: http://www.kelley.iu.edu/cholden

Jayoung Nam (Contact Author)

Southern Methodist University (SMU) - Finance Department ( email )

United States

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