The Growing Index Effect in the Corporate Bond Market

Authors

Sean Seunghun Shin, Korea Advanced Institute of Science and Technology (KAIST)Follow
Xing (Alex) Zhou, Southern Methodist University (SMU) - Finance DepartmentFollow
Qifei Zhu, National University of Singapore (NUS)Follow

Publication Date

3-17-2025

Abstract

Leveraging transaction data and AI-powered price estimates, we show that index-driven trading, fueled by the rapid growth of investment funds in the corporate bond market, has reshaped market dynamics and liquidity. Whereas intraday trading was once evenly distributed, by the end of 2024, 10% of daily volume occurred within one minute of index closing. Exploiting Bloomberg Index’s closing-time change, we establish the causal impact of indexing. Liquidity improves at closing but declines during the rest of the day, yielding a net gain. Benefits reflect temporal clustering that facilitates dealer inventory management. However, during market stress, liquidity gains weaken or reverse.

Document Type

Article

Keywords

indexing, corporate bond market, liquidity, dealer, investment fund, mutual fund, ETF

Disciplines

Finance

DOI

10.2139/ssrn.5181327

Source

SMU Cox: Finance (Topic)

Language

English