ETF Corporate Bond Ownership and Market Quality
50 Pages Posted: 3 Feb 2020
Date Written: January 12, 2020
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: Suggested Citation