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), Zijun Liu (HKMU), Seyed E. Seyedan (PIMCO), and Kathy Yuan (LSE)

We examine the determinants of repo haircuts using a regulatory transaction-level dataset of the UK market. We find that transaction maturity and collateral quality have first order importance. We also document that counterparties matter in determining haircuts. Hedge funds, as borrowers, receive significantly higher haircuts. Larger borrowers with higher ratings receive lower haircuts, but we find that these effects can be overshadowed by collateral quality. Repeated bilateral relationships also matter and generate lower haircuts. We find evidence supporting an adverse selection explanation of haircuts, but limited evidence in favor of lenders' liquidity position or default probabilities affecting haircuts. Finally, we show that banks with higher network centrality charge and pay lower haircuts.

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

We document several novel facts about exchange-traded funds (ETFs) holding corporate bonds. First, the portfolio of bonds that are exchanged for new or existing ETF shares (called creation or redemption baskets) often represents a small fraction of ETF holdings – a fact that we call “fractional baskets.” Second, creation and redemption baskets exhibit high turnover. Third, creation (redemption) baskets tend to have longer (shorter) durations and smaller (larger) bid-ask spreads relative to holdings. Lastly, ETFs with fractional baskets exhibit persistent premiums and discounts, which is related to the slow adjustment of NAV returns to ETF returns. We develop a simple model to show that an ETF’s authorized participants (APs) can act as a buffer between the ETF market and the underlying illiquid assets, and help mitigate fire sales. Our findings suggest that ETFs may be more effective in managing illiquid assets than mutual funds.

Keywords:
ETF
Bonds
Liquidity
Fire sales
Work in progress
From Black-Scholes to Cumulant Risk Premium: Evidence from Leveraged ETFs. Working paper, joint with Albert S. ("Pete") Kyle (University of Maryland)

Preliminary draft available on request.

Keywords:
ETF
Cumulants
CAPM
The Global Price of Variance Risk. Working paper, joint with Steven Heston (University of Maryland)
Keywords:
Option momentum
Variance
VIX
Commodities
Liquidity Commonality Across Asset Classes. Working paper, joint with Thummim Cho (LSE) and Andrea Tamoni (LSE)

Preliminary draft available on request.

Keywords:
Liquidity
Systemic risk
Intermediary asset pricing
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.