Underlying Bond Return Predictability by ETF Returns

36 Pages Posted: 1 May 2020

See all articles by Xiaoting Hao

Xiaoting Hao

University of Wisconsin - Milwaukee - Sheldon B. Lubar School of Business

Donghyun Kim

Chung-Ang University

Hong Kee Sul

Chung-Ang University - College of Business & Economics

Qinghai Wang

University of Central Florida - College of Business Administration

Date Written: December 7, 2019

Abstract

This paper investigates whether ETF returns lead the returns of underlying bonds and similar style bond funds. Bond prices are often stale due to their lack of liquidity, and price discovery may occur in ETFs and then in underlying bonds. As predicted, we find that ETF returns predict its own NAV returns and aggregated ETF returns for each bond also predict the underlying bond returns on a monthly basis. We show that bond liquidity is the determining factor of the predictability and the role of authorized participants is critical to the dissemination of information from ETFs to underlying bonds. Bond returns are more predictable for illiquid bonds and bonds with less ETF ownership and less absolute ETF flows. Next, we examine whether bond fund returns are also predictable. We find the predictability of bond fund returns by same style ETF returns and a bond fund portfolio strategy based on this predictability, which indicates that the bond fund market is potentially vulnerable. Our research adds to the discussion of the impact of ETFs on market efficiency.

Keywords: ETF, bond, return predictability, liquidity

JEL Classification: G11, G12, G13, G14

Suggested Citation

Hao, Xiaoting and Kim, Donghyun and Sul, Hong Kee and Wang, Qinghai, Underlying Bond Return Predictability by ETF Returns (December 7, 2019). Available at SSRN: https://ssrn.com/abstract=3570309 or http://dx.doi.org/10.2139/ssrn.3570309

Xiaoting Hao

University of Wisconsin - Milwaukee - Sheldon B. Lubar School of Business ( email )

P.O. Box 742
3202 N. Maryland Ave.
Milwaukee, WI 53201-0742
United States

Donghyun Kim (Contact Author)

Chung-Ang University ( email )

221 Heuksuk-dong
Dongjak-gu
Seoul, 156-756
Korea, Republic of (South Korea)

Hong Kee Sul

Chung-Ang University - College of Business & Economics ( email )

84 Heuk-suk Ro
Seoul
Korea, Republic of (South Korea)

Qinghai Wang

University of Central Florida - College of Business Administration ( email )

PO Box 161400
Orlando, FL 32816
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
151
Abstract Views
870
rank
246,782
PlumX Metrics