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Liquidity Fissures in the Corporate Bond Markets

In: Market Tremors

Author

Listed:
  • Hari P. Krishnan

    (SCT Capital)

  • Ash Bennington

    (Real Vision TV)

Abstract

In this chapter, we conduct another case study. In particular, we will move from a retrospective of the VolmageddonVolmageddonVolpocalypse to a forward-looking study of the US high yield corporate bond markets, in the presence of majority agents. The majority agents are authorized participantsauthorized participants (\“APs\”) (APs) in bond ETFsExchange-Traded Funds (ETFs) and to a lesser extent, investors in certain mutual fundsmutual fund. Beyond a certain size, bond market liquidity can no longer support the ETF arbitragearbitrage mechanism. This implies that a purely technical equity flash crashflash crash can cause lasting damage to the bond market. We combine a survey-based price impact estimate with a model of mutual fundmutual fund flows to calculate the potential fallout from a limit down move in various high yield ETFsExchange-Traded Funds (ETFs).

Suggested Citation

  • Hari P. Krishnan & Ash Bennington, 2021. "Liquidity Fissures in the Corporate Bond Markets," Springer Books, in: Market Tremors, chapter 0, pages 121-158, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-79253-4_5
    DOI: 10.1007/978-3-030-79253-4_5
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