Review of Financial Studies Vol. 35 No. 1 2021
The Unintended Consequences of Corporate Bond ETFs: Evidence from the Taper Tantrum
Abstract
This paper examines whether ETFs are a unique source of corporate bond fragility. Relative to mutual funds, ETFs cater to high-liquidity-demand investors, facilitate positive feedback strategies, and transmit outflows to corporate bonds via near-proportional trading. Comparing yield spread changes of bonds from the same issuer, we show that ETFs create flow-induced pressure during the Taper Tantrum, a period of market turmoil. Redemptions used to maintain the relative price efficiency of the largest and most liquid ETFs lead to significantly higher yield spreads for 4 months before reverting. The pattern indicates ETFs amplify the effects of negative fundamental shocks.
- DOI
- 10.1093/rfs/hhab031
- Volume
- 35
- Issue
- 1
- Pages
- 51-90
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref