The Unintended Consequences of Corporate Bond ETFs: Evidence from the Taper Tantrum

Caitlin D Dannhauser and Saeid Hoseinzade

The Review of Financial Studies, 2022, vol. 35, issue 1, 51-90

Abstract: This paper examines whether ETFs are a unique source of corporate bond fragility. Relative to mutual funds, ETFs cater to high-liquidity-demand investors, facilitate positive feedback strategies, and transmit outflows to corporate bonds via near-proportional trading. Comparing yield spread changes of bonds from the same issuer, we show that ETFs create flow-induced pressure during the Taper Tantrum, a period of market turmoil. Redemptions used to maintain the relative price efficiency of the largest and most liquid ETFs lead to significantly higher yield spreads for 4 months before reverting. The pattern indicates ETFs amplify the effects of negative fundamental shocks.

JEL-codes: G10 G12 G23 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (10)

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