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The Journal of Index Investing

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Pricing and Liquidity of Fixed Income ETFs in the Covid-19 Virus Crisis of 2020

Stephen Laipply and Ananth Madhavan
The Journal of Index Investing Winter 2020, 11 (3) 7-19; DOI: https://doi.org/10.3905/jii.2020.1.096
Stephen Laipply
is a managing director at BlackRock, Inc., in San Francisco, CA
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Ananth Madhavan
is a managing director at BlackRock, Inc., in San Francisco, CA
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Abstract

We show that during the 2020 Covid-19 crisis: (a) Bond ETFs acted as vehicles of price discovery, and with prices often close to their intrinsic values, despite deviations from net asset value (NAV) that at times were large; (b) Bond ETFs allowed investors to rapidly and efficiently manage exposure and risk at low costs; and (c) Contrary to some academic theories, there is no evidence of “wrong way” arbitrage.

TOPICS: Exchange-traded funds and applications, exchanges/markets/clearinghouses, volatility measures, financial crises and financial market history, performance measurement

Key Findings

  • • During the 2020 Covid-19 crisis, bond ETFs acted as vehicles of price discovery, and with prices often close to their intrinsic values, despite deviations from net asset value (NAV) that at times were large.

  • • Bond ETFs allowed investors to trade in the secondary market, and to rapidly and efficiently manage exposure and risk at low costs.

  • • The primary market where ETF shares are created and redeemed also functioned smoothly, with no evidence that the arbitrage activities of authorized participants were destabilizing.

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The Journal of Index Investing: 11 (3)
The Journal of Index Investing
Vol. 11, Issue 3
Winter 2020
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Pricing and Liquidity of Fixed Income ETFs in the Covid-19 Virus Crisis of 2020
Stephen Laipply, Ananth Madhavan
The Journal of Index Investing Nov 2020, 11 (3) 7-19; DOI: 10.3905/jii.2020.1.096

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Pricing and Liquidity of Fixed Income ETFs in the Covid-19 Virus Crisis of 2020
Stephen Laipply, Ananth Madhavan
The Journal of Index Investing Nov 2020, 11 (3) 7-19; DOI: 10.3905/jii.2020.1.096
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  • Article
    • Abstract
    • ETFS AS VEHICLES OF PRICE DISCOVERY
    • BOND ETFS CAN FACILIATE EFFICIENT TRADING
    • ARBITRAGE OPPORTUNITIES AND FLOWS
    • CONCLUSIONS
    • ADDITIONAL READING
    • ENDNOTES
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