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 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.
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 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.
Accepted at the AFA 2023Preliminary draft available here.
Preliminary draft available on request.
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.