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The impact of innovation: Evidence from corporate bond exchange-traded funds (ETFs)

Caitlin D. Dannhauser

Journal of Financial Economics, 2017, vol. 125, issue 3, 537-560

Abstract: Using distinct features of corporate bond exchange-traded funds (ETFs), I find that financial innovation has a significant and long-term positive valuation impact on the systemically important underlying securities. A one standard deviation increase in ETF ownership reduces high-yield and investment-grade bond spreads by 20.3 and 9.2 basis points, respectively, implying an average monthly price increase of 1.03% and 0.75%. Two novel quasi-natural experiments exploit exogenous changes in ETF eligibility to confirm the effect. Examining theoretical explanations for the effect, I find that ETFs decrease liquidity trader participation, increase institutional ownership, and insignificantly or negatively impact the liquidity of individual bonds.

Keywords: Exchange-traded funds; Corporate bonds; Liquidity; Liquidity traders (search for similar items in EconPapers)
JEL-codes: G23 G29 G12 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:jfinec:v:125:y:2017:i:3:p:537-560