Underlying Bond Return Predictability by ETF Returns

Hao, Xiaoting; Kim, Donghyun; Sul, Hong Kee; Wang, Qinghai

doi:10.2139/ssrn.3570309

Cited by 2 publications

(5 citation statements)

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“…These results are also the main reason why we look at the ETF universe to understand the impact of the Fed credit facilities on the underlying corporate bonds. Importantly, Hao et al (2019) findings imply that if we observe ETF prices to lead the NAV prices without reversal, and consequently we observe discrepancies between ETF prices and their NAV to open only temporarily in response to the Fed announcements, we should not necessarily conclude that bond market liquidity deteriorated. This is because these patterns can be observed when a fundamental shock changes the value of the underlying securities but is reflected faster in ETF prices, which seems to be the case for IG bonds both on March 23 rd and April 9 th , and perhaps to a smaller extent for HY bonds.…”

Section: Liquidity Risk and Persistence Of Announcement Effectsmentioning

confidence: 70%

“…Finally, we also learned a lot from the growing literature focused on ETFs. See, for example, Nam (2017), Lettau and Madhavan (2018), Dannhauser (2017), Flannery, Nimalendran, Ray, andYousefi (2017), andHao, Kim, Sul, andWang (2019).…”

Section: Literature Reviewmentioning

confidence: 99%

“…The rationale behind these figures is the following. Hao, Kim, Sul, and Wang (2019) argue that since investors are attracted to the ETF bond market because of its high liquidity and low price impact, it is possible that when a fundamental shock changes the value of the underlying security, the trading and price adjustments occur first in the ETF market and then the gap to the underlying bond market gets arbitraged away by the AP and other sophisticated investors. That is, price discovery occurs first in ETFs and then in the underlying bonds.…”

Section: Liquidity Risk and Persistence Of Announcement Effectsmentioning

confidence: 99%

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Impacts of the Fed Corporate Credit Facilities through the Lenses of ETFs and CDX

D’Amico¹,

Kurakula²

2020

SSRN Journal

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In this study, we use the liquid and efficient bond ETF prices and CDX spreads to quantify the effects of the announcements of the Primary and Secondary Market Corporate Credit Facilities on the underlying corporate bonds. We find that those announcements triggered: (i) large and positive jumps in the prices of directly-eligible ETFs as well as ETFs holding eligible bonds and their close substitutes; (ii) a discrete drop in the perceived credit risk of eligible bonds especially following the April 9 th announcement; (iii) a roaring back of investment-grade issuance and a pick-up in high-yield issuance. Importantly, across all ETFs in our sample, the magnitude of their price response does not seem directly related to the size of the reduction in either credit risk or liquidity risk, but rather appears to reflect mostly the eligibility of the ETF and its underlying bonds at the Federal Reserve facilities. This leads us to believe that the main factor driving the reaction to the announcements might be the elimination of "disaster risk" for eligible issuers.

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Section: Liquidity Risk and Persistence Of Announcement Effectsmentioning

confidence: 70%

Section: Literature Reviewmentioning

confidence: 99%

Section: Liquidity Risk and Persistence Of Announcement Effectsmentioning

confidence: 99%

See 1 more Smart Citation

Impacts of the Fed Corporate Credit Facilities through the Lenses of ETFs and CDX

D’Amico¹,

Kurakula²

2020

SSRN Journal

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“…Dannhauser (2017) documents a negative association between bond ETFs and bond spread in the secondary market. Hao et al (2019) find the bond ETF returns lead to the price discovery of constituent bonds. Pan and Zeng (2019) find that authorized participants (AP) act as both arbitragers and bond dealers in the bond ETF market.…”

Section: Related Literaturementioning

confidence: 98%

“…Such rapid development of ETFs has attracted huge attention from practitioners, researchers, and regulators, raising fundamentally important questions about the effects of ETFs on financial markets. 3 See, for example, Broman (2016), Ben-David, Franzoni, and Moussawi (2018), Da and Shive (2018), Lee (2018), Brown, Davies, and Ringgenberg (2018), and Hao, Kim, Sul, and Wang (2019) on asset pricing and Boone and White (2015), Keim (2016, 2019), and Heath et al (2021) on corporate governance.…”

Section: Introductionmentioning

confidence: 99%

Essays on Financial Markets

Liu¹

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This thesis consists of five chapters. Chapter 1 is the preliminaries. Chapter 2 to chapter 4 are the three main chapters of this thesis, which covers the U.S. market, international market, and the Chinese market, respectively. Chapter 5 is the discussion. Chapter 1 is the preliminaries. It introduces the setting and motivations for the three topics covered in this thesis. Chapter 2 investigates how equity exchange-traded fund (ETF) ownership affects the cost of debt. I find that, by facilitating short-selling activities to execute disciplinary effects, equity ETF ownership decreases a firm's cost of debt. This negative association between equity ETF ownership and the cost of debt is more pronounced for firms with weaker information environments and lower bond ratings. The disciplinary effect works through a more active short-selling market provided by equity ETF ownership. However, I fail to establish the corporate governance channel, which is consistent with Schmidt and Fahlenbrach (2017) and Heath, Macciocchi, Michaely, and Ringgenberg (2021).. Those results are also robust to endogeneity. Chapter 3 studies the predictive power of the trend strategy in the international stock market. Using data from 49 markets, I find that a trend signal exploiting the short-,intermediate-, and long-term price information can predict stock returns cross-sectionally in the international market. The significance of the trend strategy is associated with market-level characteristics such as macroeconomic conditions, culture, and the information environment. The trend premium is more pronounced in markets with a more advanced macroeconomic status, a higher level of information uncertainty and individualism, and better accessibility to foreign investors. Nevertheless, the trend strategy only outperforms the momentum strategy in a relatively short horizon. Chapter 4 investigates whether margin-trading in the Chinese stock market reflects information or sentiment. At the aggregate level, I find no evidence of information-driven or sentiment-driven margin-trading behavior. At the individual stock level, both information-driven and sentiment-driven margin-trading exists, which are relevant to firm characteristics. I also find the likelihood of sentiment-driven margin-trading significantly declined after the regulator enforced tighter rules for margin-trading in 2015. Chapter 5 summarizes the main findings of the three topics, discusses the implications of the findings, and points out the future direction for research.

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Underlying Bond Return Predictability by ETF Returns

Cited by 2 publications

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Impacts of the Fed Corporate Credit Facilities through the Lenses of ETFs and CDX

Impacts of the Fed Corporate Credit Facilities through the Lenses of ETFs and CDX

Essays on Financial Markets

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