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Corporate Bonds and Derivatives

Paper Session

Sunday, Jan. 6, 2019 1:00 PM - 3:00 PM

Hilton Atlanta, 205-206-207
Hosted By: American Finance Association
  • Chair: Robin Greenwood, Harvard Business School

ETFs and Price Volatility of Underlying Bonds

Anna Agapova
,
Florida Atlantic University
Nikanor Volkov
,
Mercer University

Abstract

The study examines effects of ETFs’ ownership and flows on underlying bonds’ returns and return volatility. On one hand, higher ETF ownership of a corporate bond is associated with a decrease in bond’s return and volatility. This is consistent with liquidity-buffer hypothesis that ETFs may absorb some illiquidity of underlying bonds. On the other hand, the magnitude of ETF in(out)flows is associated with higher volatility of bond returns, while ETF flows have positive relation with the level of bond returns. This finding suggests that ETFs create demand pressure on underlying bonds, which in turn raises questions about possible systemic risks. However, absence of bond price reversal subsequent to the ETF flows suggests that increase in underlying bonds’ volatility is an outcome of price discovery function of ETFs and not a result of increased noise trading in ETF market.

Global Perspective or Local Knowledge: The Macro-information in the Sovereign CDS Market

Yaqing Xiao
,
Rutgers University
Hongjun Yan
,
DePaul University
Jinfan Zhang
,
Chinese University of Hong Kong-Shenzhen

Abstract

We find that sovereign CDS spreads can predict future stock index returns, sovereign bond yields, as well real macroeconomic variables such as GDP and PMI. The predictive power is almost entirely from the global, rather than country-specific, component of sovereign CDS spreads. This is consistent with the interpretation that the information advantage of sovereign CDS investors is derived from their “global perspective” rather than their local knowledge about individual countries. Stock and sovereign bond market indices gradually “catch up” with sovereign CDS spreads, mostly during the days surrounding credit rating or outlook changes, and especially for downgrades.

Corporate Bond Liquidity: A Revealed Preference Approach

Sergey Chernenko
,
Purdue University
Aditya Sunderam
,
Harvard Business School

Abstract

We propose a novel measure of bond market liquidity that does not depend on transaction data. Capturing how the strength of the relation between mutual fund cash holdings and uncertainty about fund flows varies in the cross section, our measure reflects funds’ perceived illiquidity of their portfolio holdings at a given point in time. Speculative grade and smaller bonds are perceived to be significantly less liquid, with the liquidity of speculative grade bonds in particular deteriorating in the post-crisis period. Our measure can be applied to asset-backed securities, syndicated loans, and municipal securities for which publicly available data on transactions are not available.
Discussant(s)
Huaizhi Chen
,
Harvard Business School
Emil Siriwardane
,
Harvard Business School
Jack Bao
,
University of Delaware
JEL Classifications
  • G1 - General Financial Markets