Liquidity Fissures in the Corporate Bond Markets

Hari P. Krishnan () and Ash Bennington ()
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Hari P. Krishnan: SCT Capital
Ash Bennington: Real Vision TV

Chapter Chapter 5 in Market Tremors, 2021, pp 121-158 from Springer

Abstract: Abstract In this chapter, we conduct another case study. In particular, we will move from a retrospective of the VolmageddonVolmageddonVolpocalypse to a forward-looking study of the US high yield corporate bond markets, in the presence of majority agents. The majority agents are authorized participantsauthorized participants (\“APs\”) (APs) in bond ETFsExchange-Traded Funds (ETFs) and to a lesser extent, investors in certain mutual fundsmutual fund. Beyond a certain size, bond market liquidity can no longer support the ETF arbitragearbitrage mechanism. This implies that a purely technical equity flash crashflash crash can cause lasting damage to the bond market. We combine a survey-based price impact estimate with a model of mutual fundmutual fund flows to calculate the potential fallout from a limit down move in various high yield ETFsExchange-Traded Funds (ETFs).

Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-030-79253-4_5

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DOI: 10.1007/978-3-030-79253-4_5

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