Template-Type: ReDIF-Article 1.0
Author-Name: Karamfil Todorov
Title: The anatomy of bond ETF arbitrage
Abstract: Exchange-traded funds (ETFs) allow a wide range of investors to gain exposure to a variety of asset classes. They rely on authorised participants (APs) to perform arbitrage, ie align ETFs' share prices with the value of the underlying asset holdings. For bond ETFs, prominent albeit understudied features of the arbitrage mechanism are systematic differences between the baskets of bonds used to create and redeem ETF shares, and a low overlap between these baskets and actual asset holdings. These features could reflect the illiquid nature of bond trading, ETFs' portfolio management and APs' incentives. The decoupling of baskets from holdings weakens arbitrage forces but allows ETFs to absorb shocks on the bond market.
Journal: BIS Quarterly Review
File-URL: http://www.bis.org/publ/qtrpdf/r_qt2103d.pdf
File-Format: Application/pdf
File-URL: http://www.bis.org/publ/qtrpdf/r_qt2103d.htm
File-Format: text/html
Year: 2021
Month: March
Classification-JEL: G11, G12, G23
Handle: RePEc:bis:bisqtr:2103d