Karamfil Todorov

PhD in Finance, London School of Economics and Political Science

I obtained my PhD in Finance from the London School of Economics in 2020 and joined the Bank for International Settlements as an Economist.

My research interests are Empirical Asset Pricing, Institutional Investors, Macro-Finance, Fixed Income.

Research / Publications
Quantify the Quantitative Easing: Impact on Bonds and Corporate Debt Issuance
Journal of Financial Economics, 135(2), 340-358, 2020

This paper studies the impact of the ECB's Corporate Sector Purchase Programme (CSPP) announcement on prices, liquidity and debt issuance in the European corporate bond market using a dataset on bond transactions from Euroclear. I find that the QE programme increased prices and liquidity of bonds eligible to be purchased substantially. Bond yields dropped on average by 30 bps (8%) after the CSPP announcement. Tri-party repo turnover rose by 8.15 million USD (29%), and bilateral turnover went up by 7.05 million USD (72%). Bid-ask spreads also showed significant liquidity improvement in eligible bonds. QE was successful in boosting corporate debt issuance. Firms issued 2.19 billion EUR (25%) more in QE-eligible debt after the CSPP announcement, compared to other types of debt. Surprisingly, corporates used the attracted funds mostly to increase dividends. These effects were more pronounced for longer-maturity, lower-rated bonds, and for more credit-constrained, lower-rated firms.

Keywords:
Quantitative easing (QE)
Corporate Sector Purchase Programme
European Central Bank
Bond market
Corporate debt issuance
Passive Funds Affect Prices: Evidence from the Most ETF-dominated Markets
Winner, BlackRock Applied Research Award, 2019
Best Paper, 7th SUERF(European Money and Finance Forum)/UniCredit Foundation Research Prize, 2019

This paper studies the size and source of exchange-traded funds’ (ETFs) price impact in the most ETF-dominated asset classes: volatility (VIX) and commodities. To identify ETF-induced price distortions, I propose a model-independent approach to replicate the value of a VIX futures contract. This allows me to isolate a non-fundamental component in VIX futures prices that is strongly related to the rebalancing of ETFs. To understand the source of that component, I decompose trading demand from ETFs into three main parts: leverage rebalancing, calendar rebalancing, and flow rebalancing. Leverage rebalancing has the largest effects. It amplifies price changes and introduces unhedgeable risks for ETF counterparties. Surprisingly, providing liquidity to leveraged ETFs turns out to be a bet on variance, even in a market with a zero net share of ETFs.

Keywords:
ETF
Leverage
Commoditization
VIX
Futures
What Drives Repo Haircuts? Evidence from the UK Market. Working paper, joint with Christian Julliard (LSE), Gabor Pinter (BoE), and Kathy Yuan (LSE)

Using a unique transaction-level data, we document that only 60% of bilateral repos held by UK banks are backed by high quality collateral. Banks intermediate repo liquidity among different counterparties and use CCPs to reallocate high-quality collaterals among themselves. Furthermore, maturity, collateral rating and asset liquidity have important effects on repo liquidity via haircuts. Counterparty types also matter: non-hedge funds, large borrowers, and borrowers with repeated bilateral relationships receive lower (or zero) haircuts. The evidence supports an adverse selection explanation of haircuts, but does not find significant roles for mechanisms related to lenders’ liquidity position or default probabilities.

Keywords:
Repurchase Agreement
Repo market
Systemic risk
Margin
Haircut
ETFs, Illiquid Assets, and Fire Sales. Working paper, joint with John J. Shim (University of Notre Dame)

We develop a novel explanation for bond exchange-traded funds’ (ETFs) premiums and discounts based on two main variables: baskets (the portfolio of bonds that are exchanged for ETF shares), and authorized participants’ (APs) inventories. We introduce a novel methodology to infer baskets and show that they often represent a small fraction of ETF holdings – a fact that we call “fractional baskets.” We show that ETFs with more pronounced fractional baskets exhibit more persistent premiums and discounts. To study the role of inventory, we develop a simple model with the possibility of a fire sale in bonds. The model illustrates that when APs hold inventory in the underlying bonds, they act as a buffer between the ETF and the bond market and help mitigate fire sales. We find empirical support for the model’s predictions, and show that it can help explain why ETFs holding more liquid bonds traded at larger discounts during the COVID-induced market stress. Our findings also suggest that ETFs may be more effective in managing illiquid assets than mutual funds.

Keywords:
ETF
Bonds
Liquidity
Fire sales
Work in progress
Cumulant Risk Premium. Working paper, joint with Albert S. ("Pete") Kyle (University of Maryland)

Accepted at the AFA 2023

Preliminary draft available here.
Keywords:
ETF
Cumulants
CAPM
Exploring the Variance Risk Premium. Working paper, joint with Steven Heston (University of Maryland)
Keywords:
Variance riks premium
VIX
Commodities
Bond ETFs are Different: Evidence from Baskets. Working paper, joint with John J. Shim (University of Notre Dame)
Keywords:
ETF
Corporate bonds
Baskets
Understanding the Role of Dealer-Client Relationships in Bond Trading. Working paper, joint with Simon Jurkatis (BoE), Andreas Schrimpf (BIS), and Nicholas Vause (BoE)

Preliminary draft available on request.

Keywords:
OTC markets
Corporate bonds
Dealers
COVID-19
Policy publications
The anatomy of bond ETF arbitrage
BIS Quarterly Review, March 2021

Exchange-traded funds (ETFs) allow a wide range of investors to gain exposure to a variety of asset classes. They rely on authorised participants (APs) to perform arbitrage, ie align ETFs' share prices with the value of the underlying asset holdings. For bond ETFs, prominent albeit understudied features of the arbitrage mechanism are systematic differences between the baskets of bonds used to create and redeem ETF shares, and a low overlap between these baskets and actual asset holdings. These features could reflect the illiquid nature of bond trading, ETFs' portfolio management and APs' incentives. The decoupling of baskets from holdings weakens arbitrage forces but allows ETFs to absorb shocks on the bond market.

Keywords:
ETFs
Bond
Arbitrage
In the media
Bloomberg, Matt Levine
Teaching
Undergraduate students
Master students
LSE Finance Summer School
Contacts and disclaimer
Karamfil Todorov
PhD in Finance, London School of Economics and Political Science
The views expressed in this personal website are solely of Karamfil Todorov, and should not be interpreted as reflecting the views of the Bank for International Settlements.