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The impact of fixed-income Etfs on the volatility of bond prices - an empirical analysis
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By creating an additional layer of market-making power that absorbs liquidity shocks and improving price discovery for bonds, I find empirical evidence that fixed-income ETF Owner-ship decreases the volatility of the ETFs’ underlying securities. This effect is especially high for high yield bonds and during times of market distress. Moreover, I find evidence that the negative relationship between ETF Ownership and volatility only applies to particularly illiquid bonds. In contrast, equity ETF Ownership increases the volatility of the ETF baskets’ underlying stocks. The difference arises from the substantially different way the assets are traded: Over-the-Counter versus centralized exchange.
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Exchange traded funds Bonds Volatility Fixed income Returns