Market Accessibility, Corporate Bond ETFs, and Liquidity
I find that market accessibility ex ante plays an important role in how the underlying assets' liquidity changes when a basket security is introduced. First, using a multi-market version of the Kyle model, I show that the less (more) accessible the underlying market is, the more its liquidity improves (deteriorates) when basket trading becomes available. Second, I empirically test these predictions using corporate bonds before and after the introduction of ETFs. Consistent with the model, liquidity improvement is larger for highly arbitraged, low-volume, high-yield, and long-term bonds and for 144A bonds to which retail investor access is not permitted.
Market Accessibility, ETFs, Corporate Bonds, Liquidity
SMU Cox: Finance (Topic)