Financial Intermediary Funding Constraints and Segmented Markets

Samuel J. Hempel, Dasol Kim and Russ Wermers

No 22-01, Working Papers from Office of Financial Research, US Department of the Treasury

Abstract: This working paper examines the role of financial intermediaries, namely authorized participants (APs), in the propagation of shocks across funds that they support and the underlying assets held by those funds. Corporate bond ETF trades by the Federal Reserve through the Secondary Market Corporate Credit Facility (SMCCF) beginning in May 2020 were extremely large and likely alleviated inventory capacity constraints for APs that were counterparties to those transactions. ETFs that were not traded by the Federal Reserve, but overlap in their bond holdings with those traded, exhibit a positive and significant price reaction within minutes of the transaction. Consistent evidence is found for the prices of their underlying bonds. The paper's findings support the view that the inclusion of ETFs in the SMCCF had broader "spillover" effects in stabilizing markets beyond the ETFs directly targeted by the program (Working Paper no. 22-01).

Date: 2022-02-10
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Persistent link: https://EconPapers.repec.org/RePEc:ofr:wpaper:22-01

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