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Bond Market Price Discovery: Clarity Through the Lens of an Exchange

Fixed-income exchange-traded funds (ETFs) are bond portfolios that trade on a stock exchange. They present a unique opportunity to compare the valuation of fixed-income securities on exchange-driven and over-the-counter (OTC) markets. Tucker and Laipply quantify the price discovery properties of fixed-income ETFs, focusing in particular on the speed at which the ETF and OTC bond markets reflect new price information. They find that fixed-income ETF price movements can potentially serve as a leading signal for subsequent OTC bond market movements (as proxied by bond market indices), especially when volatility is high. The authors also explore potential trading strategies that capitalize on this dynamic.