Karamfil Todorov

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.

This paper studies ETF price impact in the most ETF-dominated asset classes: volatility (VIX) and commodities. I propose a new way to measure ETF-related price distortions based on the specifics of futures contracts. This allows me to isolate a component in VIX futures prices that is strongly related to the rebalancing of ETFs. I derive a novel decomposition of ETF trading demand into leverage rebalancing, calendar rebalancing, and flow rebalancing, and show that trading against ETFs is risky. Leverage rebalancing has the largest effects on the ETF-related price component. This rebalancing amplifies price changes and exposes ETF counterparties to variance.

We develop a novel methodology to measure the risk premium of higher-order cumulants (closely related to the moments of a distribution) based on leveraged ETFs. We show that the risk premium on these ETFs reflects the difference between physical and risk-neutral cumulants, which we call the cumulant risk premium (CRP). We show that the CRP is different from zero across asset classes (equities, bonds, commodities, currencies, and volatility) and is large in times of stress. We illustrate that highly leveraged strategies are extremely exposed to higher-order cumulants. Our results have implications for hedge funds, factor models, momentum strategies, and options.

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.

We document that the carry of crypto futures, i.e. the difference between futures and spot prices, can become very large (up to 60% p.a.) and varies strongly over time. This behavior is most consistent with the existence of a highly volatile crypto convenience yield that stems from two main forces: (i) trend-chasing and attention by smaller investors seeking leveraged upside exposure to crypto assets in boom periods, and (ii) the relative scarcity of "arbitrage" capital taking the other side through a cash and carry position. Engaging in the latter is risky due to spikes in margins and liquidations amid drawdowns. The interplay between these two forces, and the involved high leverage, may help explain why severe market crashes are a frequent feature of crypto markets.

Can ETFs trigger fire sales in illiquid assets? We develop and empirically examine a model where an authorized participant (AP) holds bond inventory and connects the ETF to the underlying bond market. For redemptions, the AP acts as a buffer between the two markets, holding redeemed bonds to preserve the mark-to-market value of her inventory and avoid a fire sale. The AP behaves asymmetrically for creation and transmits ETF purchases to the bond market to boost mark-to-market values. The AP’s costs of handling creations/redemptions are paid by liquidity-demanding ETF investors via premiums/discounts. We document new empirical facts motivated by the model, and provide a novel explanation for why ETFs holding more liquid bonds traded at larger discounts than those holding illiquid bonds during the COVID-induced sell-off in March 2020. Our findings show that ETFs have advantages over mutual funds in managing illiquid assets.

This paper explores the variance risk premium in option returns across twenty different futures, including equities, bonds, currencies, and commodities (energy, metals, and grains). We implement a novel model-free methodology that constructs tradable option portfolios, which replicate realized variance. In the period 2006-2020, most assets had significant variance risk premiums, but the realized S&P 500 variance risk premium was not significantly different from zero. Within a particular asset, option prices across different strikes are related to the level of volatility and the correlation of volatility with futures returns. Returns to variance are not associated with systematic risk, but are related to fat tails, consistent with option dealers demanding a premium for holding idiosyncratic volatility risk. Contrary to Bollerslev et al. (2009), we find that option-implied variance does not positively predict underlying futures returns for the majority of assets. However, implied variance does predict returns to variance-sensitive option portfolios.

We find that clients with stronger past trading relationships with a dealer receive consistently better prices in corporate bond trading. The top 1% of relationship clients enjoy transaction costs that are 51% lower than those of the median client—an effect which was particularly beneficial when transaction costs spiked during the COVID-19 turmoil. We find clients’ liquidity provision to be a key motive why dealers grant relationship discounts: clients to whom balance-sheet constrained dealers can turn as a source of liquidity are rewarded with relationship discounts. Another important motive for dealers to give discounts to relationship clients is because these clients generate the bulk of dealers’ profits. Finally, we find no evidence that extraction of information from clients’ order flow is related to relationship discounts.

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.

The first US bitcoin (BTC) exchange-traded fund (ETF), "BITO", started trading on 19 October 2021. The fund debuted as one of the most heavily traded ETFs in market history, attracting more than $1 billion in assets in the first few days. Subsequently, the ETF accumulated a significant share of all short-term bitcoin futures contracts, reaching about one third of the underlying futures market just 10 days after its launch (Graph A, first panel). This box explains how the futures-based structure of BITO differs from that of more traditional, non-futures-based equity ETFs and analyses the possible implications for prices and risks.

The transition from Libor to "nearly risk-free" rates (RFRs) has led to structural changes that have reshaped the trading and hedging behaviour of participants in fixed income markets. Using the BIS Triennial Survey statistics, we document four major changes in the instrument mix and geographical distribution of the global turnover of OTC interest rate derivatives between 2019 and 2022. First, forward rate agreements (FRAs) became largely obsolete because of reduced fixing risk. This led to a decline in FRA trading, which dragged down overall turnover. Second, trading in swaps referencing RFRs increased. Third, the UK and US shares in global turnover dropped, whereas the share of the euro area rose. Finally, new instruments emerged to manage morphing basis risks in the post-Libor world.

The compression of equity market volatility (VIX) throughout most of 2023 seems puzzling. Some observers relate the drop in VIX to the recent rise of trading in short-term options on the S&P 500 index that expire on the day of trading (zero-days-to-expiry or 0DTE). In this box, we show that the increased trading in 0DTEs in the past few years did not, on net, lure activity away from one-month options and thus is unlikely to be the main explanation behind the drop in VIX. We then propose an alternative explanation: option dealers effectively dampen volatility when they hedge structured products, which have become more popular recently.

The past decade's low rate environment challenged traditional life insurers' business models and has been a catalyst for ongoing shifts in the sector. To sustain profitability, life insurers have increased exposures to riskier and less liquid asset classes. Some have also offloaded risks through complex reinsurance agreements, often to offshore centres, partly with an eye to economising on capital. Private equity firms have been a driving force behind these trends. They have funnelled investment into private markets by acquiring or partnering with life insurers or assuming insurance portfolios through affiliated reinsurers. While more diversified investments and greater risk-sharing can, in principle, support insurers' resilience, losses in private markets could propagate risks across an increasingly interconnected and complex insurance landscape.