Corporate Bond ETFs, Bond Liquidity, and ETF Trading Volume

Abstract

This study examines the impact of corporate bond ETFs on the liquidity of their underlying securities. Utilizing panel regressions in levels and changes, controlling for past liquidity, and conducting subsample tests—including periods of market stress and arbitrage—alongside a novel quasi-natural experiment, it tackles the identification challenges of self-selection and ETF versus index effects. The results reveal that ETFs significantly lower transaction costs and improve bond liquidity. Importantly, the trading volume of ETFs appears beneficial, particularly by facilitating short selling and contributing to the transformation of the corporate bond market.

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

JEL Classification: G10, G14