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

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  • Dannhauser, Caitlin D.

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.

Suggested Citation

  • Dannhauser, Caitlin D., 2017. "The impact of innovation: Evidence from corporate bond exchange-traded funds (ETFs)," Journal of Financial Economics, Elsevier, vol. 125(3), pages 537-560.
    • Handle: RePEc:eee:jfinec:v:125:y:2017:i:3:p:537-560
    DOI: 10.1016/j.jfineco.2017.06.002
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    More about this item

    Keywords

    Exchange-traded funds; Corporate bonds; Liquidity; Liquidity traders;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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