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

60 Pages Posted: 23 Nov 2020 Last revised: 19 Dec 2024

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 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 bond selection or ETFs' own trading activity. Rather, ETFs' disclosure of end-of-day bond pricing is associated with lower retail markups by 5-9 basis points. 

Keywords: market transparency, information asymmetry, dealer markups, municipal bonds, over-the-counter markets, exchange-traded funds

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)

Hong Kong Baptist University ( email )

Renfrew Road 34
Kowloon Tong
Hong Kong

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