Template-Type: ReDIF-Paper 1.0
Author-Name:  John J Shim
Author-X-Name-First: John J
Author-X-Name-Last: Shim
Author-Name: Karamfil Todorov
Author-X-Name-First: Karamfil
Author-X-Name-Last: Todorov
Title: ETFs, illiquid assets, and fire sales
Abstract: We document several novel facts about exchange-traded funds (ETFs) holding corporate bonds. First, the portfolio of bonds that are exchanged for new or existing ETF shares (called creation or redemption baskets) often represents a small fraction of ETF holdings – a fact that we call "fractional baskets." Second, creation and redemption baskets exhibit high turnover. Third, creation (redemption) baskets tend to have longer (shorter) durations and smaller (larger) bid-ask spreads relative to holdings. Lastly, ETFs with fractional baskets exhibit persistent premiums and discounts, which is related to the slow adjustment of NAV returns to ETF returns. We develop a simple model to show that an ETF's authorized participants (APs) can act as a buffer between the ETF market and the underlying illiquid assets, and help mitigate fire sales. Our findings suggest that ETFs may be more effective in managing illiquid assets than mutual funds.
Length: 54 pages
Creation-Date: 2021-11
File-URL: https://www.bis.org/publ/work975.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work975.htm
File-Format: text/html
Number: 975
Keywords: bonds, ETFs, fire sales, liquidity
Classification-JEL: G01, G11, G12, G23
Handle: RePEc:bis:biswps:975