Corporate Bond ETFs, Bond Liquidity, and ETF Trading Volume

Abstract

This research examines the influence of corporate bond Exchange-Traded Funds (ETFs) on the liquidity of their underlying securities. Findings indicate that corporate bond ETFs reduce transaction costs for their constituent bonds, and so even during periods of arbitrage and market stress. Through the utilization of a quasi-natural experiment, the study addresses self-selection and index effect identification issues, establishing a positive causal relation between ETF ownership and bond liquidity. The trading volume of corporate bond ETFs, which is 6.67 times larger than their arbitrage, appears to be beneficial.

Keywords: Exchange-traded funds, Corporate bonds, Liquidity, Trading Volume

JEL Classification: G10, G14