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

We show that index tracking has created a de facto close in the U.S. corporate bond market. Unlike equities, corporate bonds trade over the counter without an official close, and volume was historically evenly distributed intraday. By 2024, however, 10% of daily volume occurs within one minute of the major indices’ pricing time. Bloomberg’s index pricing-time change identifies the causal effect of indexing. Liquidity improves around this pricing time but worsens during the rest of the day, yielding a net gain. These benefits reflect temporal clustering that facilitates dealer inventory management, but weaken or reverse during stress.

Document Type

Article

Keywords

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

Disciplines

Finance

Source

SMU Cox: Finance (Topic)

Language

English