ETF Corporate Bond Ownership and Market Quality

50 Pages Posted: 3 Feb 2020

See all articles by Meredith Rhodes

Meredith Rhodes

Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration

Joseph R. Mason

Louisiana State University - Ourso School of Business; University of Pennsylvania - Wharton Financial Institutions Center

Date Written: January 12, 2020

Abstract

This paper examines the role exchange-traded funds (ETFs) play in providing information to underlying corporate bond markets. We document liquidity improvements for individual corporate bonds regardless of market direction. That increased liquidity, however, comes at the cost of greater market sensitivity. Three separate tests show that increased ETF ownership increases the systematic risk component of bond prices and disrupts the flow of firm-specific information to underlying bonds. The results suggest, therefore, that while ETF ownership improves bond market liquidity, ownership is associated with a dissociation between bond prices and firm fundamentals. Mutual fund ownership does not have the same effect, suggesting the active intraday trading that is the hallmark of ETFs may also serve as the mechanism through which information flow is affected.

Keywords: Financial Intermediation, Fixed Income Securities, Bonds, Exchange-traded Funds, Information

JEL Classification: G0, G12, G23

Suggested Citation

Rhodes, Meredith and Mason, Joseph R., ETF Corporate Bond Ownership and Market Quality (January 12, 2020). Available at SSRN: https://ssrn.com/abstract=3522751 or http://dx.doi.org/10.2139/ssrn.3522751

Meredith Rhodes

Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration

Baton Rouge, LA 70803-6308
United States

Joseph R. Mason (Contact Author)

Louisiana State University - Ourso School of Business

2900 Business Education Complex
Baton Rouge, LA 70803
United States
202-683-8909 (Phone)

University of Pennsylvania - Wharton Financial Institutions Center ( email )

3641 Locust Walk
Philadelphia, PA 19104-6218
United States

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