Pre-Trade Transparency and Price Efficiency: Evidence from Corporate Bond ETFs
Using a high-frequency corporate bond benchmark prices, we develop intraday benchmark NAV for corporate bond ETF. Comparing ETF traded price to our benchmark, we derive a benchmark implied measure of mispricing. Our mispricing measure forecasts prices and quantities: underpriced funds exhibit higher future returns as well as stronger redemption from authorized participants, and vice versa. Building analogous high-frequency benchmarks for Israeli corporate bond ETFs and US stock ETFs, two products where portfolio holdings trade in highly transparent markets, we find no evidence of mispricing. Our findings suggest that the lack of pre-trade transparency in the secondary US corporate bond market hinders price discovery. This underscores the need for policies on market fairness and pre-trading transparency.