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Welcome to the 2017 AFS Annual Meeing, being held this year, in conjunction with FPA in Nashville!
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Sunday, October 1 • 11:30am - 12:20pm
D1b Bond ETFs and Price Volatility of Underlying Securities [CFP Fixed Income]

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ETFs may be preferred over direct investment in illiquid securities, e.g. bonds, as ETFs can provide insurance, diversification and simplified way of investing in such assets. However, demand volatility for bond ETFs may distort prices and raise price volatility of underlying securities. This may lead to investors facing a tradeoff between investing in bond securities through ETFs versus choosing bonds not associated with ETFs. We find that the level of ETF ownership in corporate bonds has a negative association with bond return volatilities and bond return. This can be due to liquidity improvement of the bonds held by ETFs through the price discovery function provided by the ETF market. However, we document a non-linear V-shape relation between the bond level ETF flows and return volatility of underlying securities, and a positive linear relation between ETF flows and bond returns. In multivariate analysis, unsigned net ETF flows to a bond are positively related to bond return volatility, and ETF flows are positively related to bond returns. This result is consistent with the prediction that demand pressure in the bond ETF market translates into higher return volatility of underlying bonds, and increased (decreased) return level of underlying bonds as positive (negative) shocks to the capital flows to ETFs holding the bonds occur.

Author(s): Nikanor Volkov, Anna Agapova, Ph.D.


Nikanor Volkov

Mercer University

Sunday October 1, 2017 11:30am - 12:20pm
Mockingbird 1

Attendees (3)