Associate Professor Margarita Kaprielyan at Elon’s Business School co-authored research suggesting that bond ETFs may help stabilize prices.
A recent study by Margarita Kaprielyan, associate professor of finance at the Martha and Spencer Love School of Business, challenges a common concern in investing: Do exchange-traded funds or ETFs make the bond market more unstable?
The research titled, “ETFs and the price volatility of underlying bonds”, finds the opposite—bond ETFs actually help stabilize prices and may make the market more efficient.
ETFs are investment funds that let people buy and sell a mix of stocks or bonds, similar to how they trade a single stock. While stock market ETFs have been studied for years, bond ETFs, which now manage $1.7 trillion, may not have been examined as closely.
Looking at data from 2010 to 2022, Kaprielyan and co-authors found that bond ETFs reduce price volatility rather than increase it.
Key Findings:
- ETFs smooth out price swings. When ETF ownership in corporate bonds increases, price volatility decreases.
- High-yield bonds benefit the most. The inclusion of bonds in an ETF decreases volatility, with the effect being more pronounced for high-yield bonds.
- ETF trading creates a liquidity buffer. This means investors can buy and sell bonds more easily, preventing extreme price drops.
The research was published in the Financial Review with co-authors Associate Professor Anna Agapova at Florida Atlantic University and Associate Professor Nikanor Volkov at Mercer University. Kaprielyan and Volkov both graduated from Florida Atlantic University.
“The research can be utilized in the classroom for discussions on ETFs and bonds. Bonds are less liquid than stocks but represent a larger market,” said Kaprielyan. “While some research suggests that ETFs can destabilize the prices of stocks they invest in, the examination of bonds yields different results due to differences in market structure, liquidity, and security characteristics. Students need to understand these distinctions, as the findings highlight the fundamental differences between stock and bond markets.”
Margarita Kaprielyan joined Elon University in the Fall of 2017 and previously taught at Florida Atlantic University, as she was pursuing her PhD in Finance. She currently teaches Real Estate Finance and Financial Modeling.