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

41 Pages Posted: 5 Dec 2019 Last revised: 16 Nov 2020

See all articles by Matías Braun

Matías Braun

ESE Business School, Universidad de los Andes

Rodrigo Andres Wagner

UAI Business School ; Growth Lab - Harvard University (Center for Int. Development)

Date Written: November 18, 2019

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

Suggested Citation

Braun, Matias and Wagner, Rodrigo Andres, Are there Pricing Spillovers within ETFs? Evidence from Emerging Market Corporate Bonds (November 18, 2019). Available at SSRN: https://ssrn.com/abstract=3489564 or http://dx.doi.org/10.2139/ssrn.3489564

Matias Braun

ESE Business School, Universidad de los Andes ( email )

Av. La Plaza 1905
San Carlos de Apoquindo, Las Condes
Santiago
Chile

Rodrigo Andres Wagner (Contact Author)

UAI Business School

Diagonal Las Torres 2700
Penalolen
Santiago
Chile

HOME PAGE: http://https://sites.google.com/site/rodrigoawagner

Growth Lab - Harvard University (Center for Int. Development) ( email )

79 John F. Kennedy Street
Cambridge, MA MA 02138
United States

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