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Market accessibility, bond ETFs, and liquidity

Author

Listed:
  • Craig W Holden
  • Jayoung Nam

Abstract

We develop a stylized model that generates the following empirical predictions: the less (more) accessible the underlying market is ex ante, the more its liquidity improves (deteriorates) when basket trading becomes available. We empirically test these predictions using corporate bonds before and after the introduction of exchange-traded funds. Consistent with the model’s prediction, liquidity improvement is larger for highly arbitraged, low-volume, and high-yield bonds, and for 144A bonds to which retail investor access is prohibited by law. Our article leads to a more nuanced understanding of the impact of basket security introduction than previous research suggested.

Suggested Citation

  • Craig W Holden & Jayoung Nam, 2024. "Market accessibility, bond ETFs, and liquidity," Review of Finance, European Finance Association, vol. 28(5), pages 1725-1758.
    • Handle: RePEc:oup:revfin:v:28:y:2024:i:5:p:1725-1758.
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    File URL: http://hdl.handle.net/10.1093/rof/rfae016
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    More about this item

    Keywords

    exchange-traded funds (ETFs); corporate bonds; liquidity; market accessibility;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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