Corporate Bond ETFs, Bond Liquidity, and Stressed Markets

38 Pages Posted: 19 Apr 2019 Last revised: 13 May 2022

See all articles by Thomas Marta

Thomas Marta

Wilfrid Laurier University - Lazaridis School of Business and Economics

Date Written: November 1, 2019

Abstract

This paper examines the impact of corporate bond Exchange-Traded Funds (ETFs) on the liquidity of their bonds. I find that corporate bond ETFs decrease the transaction costs of their constituent securities. The use of a quasi-natural experiment, that controls for the identification issues of self-selection and of an index effect, establishes a causal relation between ETF ownership and bond liquidity. Moreover, ETFs do not deteriorate the liquidity of their bonds during ETF arbitrage and market stress events. The ETF trading volume appears to be the transmission mechanism driving the results.

Keywords: Exchange-traded funds, Corporate bonds, Liquidity

JEL Classification: G12, G14, G15

Suggested Citation

Marta, Thomas, Corporate Bond ETFs, Bond Liquidity, and Stressed Markets (November 1, 2019). Available at SSRN: https://ssrn.com/abstract=3350519 or http://dx.doi.org/10.2139/ssrn.3350519

Thomas Marta (Contact Author)

Wilfrid Laurier University - Lazaridis School of Business and Economics ( email )

64 University Ave W
Waterloo, Ontario N2L 3C7
Canada

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