The new working paper examines the interrelationships between traders, insurance companies, investment funds, and ETFs in the US corporate bond market.
The results show strong interdependencies and long-lasting effects of shocks between intermediaries. In this dynamic environment, traders respond primarily to the trading activity of active intermediaries—funds and ETFs—but not to insurance companies, which have a long-term orientation.
Funds and ETFs have a negative relationship with insurance companies and thus act complementarily in the market – a difference that results from regulatory requirements and different investment mandates. Following bond downgrades, insurance companies often sell to funds, mediated by traders who provide liquidity and enable trading between the two sides.
Link to the paper