Publication Type
Working Paper
Version
publishedVersion
Publication Date
3-2022
Abstract
Capital constraints of financial intermediaries can affect liquidity provision. We investigate whether these constraints spillover and consequently cause contagion in the degree of market efficiency across assets managed by a common intermediary. Specifically, we provide evidence of strong comovement in pricing gaps between ETFs and their constituents for ETFs served by the same lead market maker (LMM). The effects are stronger for ETFs that are more illiquid and volatile, when the underlying constituents of the ETFs are more costly to arbitrage, and for LMMs with more constrained capital. Using extreme disruptions in debt markets during COVID-19 as an experiment, we show that non-fixed income ETFs serviced by LMMs managing a larger fraction of fixed income ETFs experience greater pricing gaps. Overall, our results indicate that intermediaries' constraints indeed influence comovements in pricing efficiencies.
Keywords
ETFs, financial intermediaries, capital constraints
Discipline
Finance | Finance and Financial Management
Research Areas
Finance
First Page
1
Last Page
51
Publisher
Singapore Management University Lee Kong Chian School of Business Research Paper Seriesess
City or Country
Singapore
Citation
HONG, Claire Yurong; LI, Frank Weikai; and SUBRAHMANYAM, Avanidhar.
Financial intermediaries and contagion in market efficiency: The case of ETFs. (2022). 1-51.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/7021
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
External URL
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4062962