Market Accessibility, Corporate Bond ETFs, and Liquidity

Authors

Jayoung Nam, Southern Methodist University (SMU) – Finance DepartmentFollow
Craig W. Holden, Indiana University - Kelley School of Business - Department of FinanceFollow

Publication Date

11-30-2017

Abstract

We develop a stylized model that generates the following empirical predictions: the less (more) accessible the underlying market is ex ante, the more its liquidity improves (deteriorates) when basket trading becomes available. We empirically test these predictions using corporate bonds before and after the introduction of ETFs. Consistent with the model's prediction, liquidity improvement is larger for highly arbitraged, low-volume, and high-yield bonds, and for 144A bonds to which retail investor access is prohibited by law. Our paper leads to a more nuanced understanding of the impact of basket security introduction than previous research suggested.

Document Type

Article

Keywords

Market Accessibility, ETFs, Corporate Bonds, Liquidity

Disciplines

Finance

DOI

10.2139/ssrn.3083257

Source

SMU Cox: Finance (Topic)

Language

English