Exchange-Traded Funds and Transparency in Over-the-Counter Markets

58 Pages Posted: 23 Nov 2020 Last revised: 7 May 2023

See all articles by Viet-Dung Doan

Viet-Dung Doan

Purdue University - Krannert School of Management

Date Written: April 10, 2020

Abstract

This paper explores a new channel through which exchange-traded funds (ETFs) can affect underlying asset prices. In over-the-counter markets, daily disclosure of ETF portfolio holdings increases pre-trade price transparency and thereby retail investors' bargaining power. I show that ETF-held municipal bonds have significantly lower dealer markups than observationally similar non-ETF-held bonds. This effect cannot be explained by selection or ETFs' own trading activity. Rather, ETF disclosure quality is associated with lower retail markups by up to 30 basis points. In the primary market, when municipalities have outstanding ETF-held bonds, their new issues have lower yields and smaller price dispersion.

Keywords: exchange-traded funds, market transparency, municipal bonds, price dispersion, OTC markets

JEL Classification: G12, G14, G23

Suggested Citation

Doan, Viet-Dung, Exchange-Traded Funds and Transparency in Over-the-Counter Markets (April 10, 2020). Available at SSRN: https://ssrn.com/abstract=3703875 or http://dx.doi.org/10.2139/ssrn.3703875

Viet-Dung Doan (Contact Author)

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

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