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ETFs and the price volatility of underlying bonds

Author

Listed:
  • Anna Agapova
  • Margarita Kaprielyan
  • Nikanor Volkov

Abstract

We investigate whether exchange traded funds (ETFs) distort bond prices or increase price volatility. Contrary to concerns, we find that ETF ownership of corporate bonds is linked to reduced price volatility, likely due to ETFs absorbing bond illiquidity. Monthly net ETF inflows (outflows) increase (decrease) volatility for investment‐grade bonds but have no effect on high‐yield bonds. Additionally, daily ETF flows negatively correlate with same‐day bond returns. Overall, our results suggest that bond ETFs enhance market efficiency, acting as a liquidity buffer rather than contributing to demand pressure as seen with stock ETFs.

Suggested Citation

  • Anna Agapova & Margarita Kaprielyan & Nikanor Volkov, 2025. "ETFs and the price volatility of underlying bonds," The Financial Review, Eastern Finance Association, vol. 60(3), pages 667-700, August.
    • Handle: RePEc:bla:finrev:v:60:y:2025:i:3:p:667-700
    DOI: 10.1111/fire.12426
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    References listed on IDEAS

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    2. Umut Kemeç & Veysel Kula & Ender Baykut, 2025. "Decoding ETF Market Movements: The Impact of Internal and External Factors," Journal of Research in Economics, Politics & Finance, Ersan ERSOY, vol. 10(3), pages 1122-1142.

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