Asset Fire Sales by Corporate Bond ETFs in the COVID-19 Crisis
42 Pages Posted: 12 Sep 2022
Date Written: March 31, 2022
Abstract
We investigate the short-term price impact of asset fire sales by corporate bond exchange-traded funds (ETFs) during the COVID-19 crisis, based on daily ETF holdings and flows data. We document that ETFs’ fire sales generate significantly greater price impact on their underlying corporate bonds in the crisis period compared to non-crisis periods. Moreover, this effect concentrates on investment-grade (IG) bonds rather than high-yield (HY) bonds and disappears after the Federal Reserve’s intervention in the corporate bond market. Further analysis provides a potential explanation for the contrasting differences between IG and HY bonds: IG (HY) ETF flows tend to shift towards positive (negative) feedback trading in the crisis. In general, the evidence suggests that ETFs are a potential source of corporate bond fragility in the COVID-19 crisis.
Keywords: Corporate bond ETFs, asset fire sales, price impact, COVID-19 crisis, ETF flows, corporate bond fragility, Federal Reserve’s intervention
JEL Classification: G14
Suggested Citation: Suggested Citation