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

Exchange Traded Funds (ETFs)

“…Investors may be willing to pay a premium for access to assets with greater liquidity. Dannhauser (2016) finds that the introduction of corporate bond ETFs leads to a decrease in the liquidity of the underlying bonds, suggesting a crowding out effect. Pan and Zeng (2016) propose a complementary effect: Because APs have a dual role in financial markets-APs and market makers-they may occasionally consume more liquidity than they provide.…”

Debt Issuance in the Era of Passive Investment

“…Only a few papers have studied the effects of corporate bonds' inclusion in tracked bond indices. Dannhauser (2017) examines the effects of ETF ownership on bond yields by looking at changes to Markit iBoxx bond indices rules. Dick-Nielsen and Rossi (2017) estimate the cost of liquidity in corporate bonds using index exclusions as a laboratory.…”

The Shift From Active to Passive Investing: Potential Risks to Financial Stability?

“…The net effect depends on the relative magnitude of these two channels, but the research literature does not offer a consensus on which dominates. Dannhauser (2017) shows that ETF ownership is associated with reduced liquidity for investmentgrade corporate bonds, but Holden and Nam (2019) find that ETF ownership of high-yield bonds improves their liquidity. In a separate vein, Brogaard, Heath, and Huang (2019) show that passive equity ETF indexing may have a bifurcating effect on the liquidity of the funds' constituent assets by improving the liquidity of liquid stocks while making illiquid stocks less liquid.…”