Index Driven Price Pressure in Corporate Bonds

Research output: Working paperResearch

Abstract

Inclusion and exclusion of bonds from major indices are information-free, monthly events. At these events, liquidity providers get a significant abnormal return by trading against index trackers. The return is highest for bonds that are excluded because of a recent downgrade with a one-day return of 356.2 bps (T-stat 2.82). Liquidity provision at exclusions is more profitable than at inclusions because index trackers follow a sampling strategy and returns also increase when liquidity provision becomes more expensive. Furthermore, price reactions following index changes are reversed shortly after the event date which indicate temporary price pressure.
Inclusion and exclusion of bonds from major indices are information-free, monthly events. At these events, liquidity providers get a significant abnormal return by trading against index trackers. The return is highest for bonds that are excluded because of a recent downgrade with a one-day return of 356.2 bps (T-stat 2.82). Liquidity provision at exclusions is more profitable than at inclusions because index trackers follow a sampling strategy and returns also increase when liquidity provision becomes more expensive. Furthermore, price reactions following index changes are reversed shortly after the event date which indicate temporary price pressure.
LanguageEnglish
Place of Publicationwww
PublisherSSRN: Social Science Research Network
Number of pages38
DOIs
StatePublished - 2012

Keywords

  • Short-Term Reversals
  • Lehman/Barclay Bond Index
  • Liquidity Provision
  • Illiquid Market
  • TRACE

Cite this

Dick-Nielsen, J. (2012). Index Driven Price Pressure in Corporate Bonds. www: SSRN: Social Science Research Network. DOI: 10.2139/ssrn.2022956
Dick-Nielsen, Jens. / Index Driven Price Pressure in Corporate Bonds. www : SSRN: Social Science Research Network, 2012.
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Dick-Nielsen, J 2012 'Index Driven Price Pressure in Corporate Bonds' SSRN: Social Science Research Network, www. DOI: 10.2139/ssrn.2022956

Index Driven Price Pressure in Corporate Bonds. / Dick-Nielsen, Jens.

www : SSRN: Social Science Research Network, 2012.

Research output: Working paperResearch

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Dick-Nielsen J. Index Driven Price Pressure in Corporate Bonds. www: SSRN: Social Science Research Network. 2012. Available from, DOI: 10.2139/ssrn.2022956