The Unintended Consequences of Corporate Bond ETFs: Evidence from the Taper Tantrum

43 Pages Posted: 2 Apr 2020 Last revised: 14 Jul 2021

See all articles by Caitlin D Dannhauser

Caitlin D Dannhauser

Villanova University - Department of Finance

Saeid Hoseinzade

Suffolk University - Department of Finance

Date Written: March 3, 2021

Abstract

This paper examines whether ETFs are a unique source of corporate bond fragility. Relative to mutual funds, ETFs cater to high-liquidity-demand investors, facilitate positive feedback strategies, and transmit outflows to corporate bonds via near proportional trading. Comparing yield spread changes of bonds from the same issuer, we show that ETFs create flow-induced pressure during the Taper Tantrum, a period of market turmoil. Redemptions used to maintain the relative price efficiency of the largest and most liquid ETFs lead to significantly higher yield spreads for 4 months before reverting. The pattern indicates ETFs amplify the effects of negative fundamental shocks.

Keywords: Corporate Bonds, ETFs, Mutual Funds, Turmoil

JEL Classification: G12, G23, G10

Suggested Citation

Dannhauser, Caitlin D and Hoseinzade, Saeid, The Unintended Consequences of Corporate Bond ETFs: Evidence from the Taper Tantrum (March 3, 2021). Available at SSRN: https://ssrn.com/abstract=3559433 or http://dx.doi.org/10.2139/ssrn.3559433

Caitlin D Dannhauser (Contact Author)

Villanova University - Department of Finance ( email )

United States
610-519-4348 (Phone)

Saeid Hoseinzade

Suffolk University - Department of Finance ( email )

8 Ashburton Place-Beacon Hill
Boston, MA 02108-2770
United States

HOME PAGE: http://www.suffolk.edu/business/faculty/66494.php

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