Are there Pricing Spillovers within ETFs? Evidence from Emerging Market Corporate Bonds

Abstract

Various financial theories predict that the entry of a new security into an exchange-traded-fund (ETF) could impact the price of the other constituents of that ETF. We test these theories using data from Emerging Market Corporate Bonds between 2012 and 2017. We find that the entry of a new bond into an ETF in fact lowers the price of similar constituent bonds. Additionally, we also find that a relevant part of this effect is transitory, being reversed after a few months. This central fact is robust to alternative measures of bond similarity and to different proxies for returns. Additionally, the effect is also stronger for less liquid bonds and when the short run ability to absorb this entry shock is more limited. Taken together, our findings support liquidity models of price-pressure.

Keywords: ETFs, fixed income, liquidity, inventory risk, i-Shares

JEL Classification: G12, G14, G15, F30