Do ETFs Increase Volatility?
Ohio State University - Fisher College of Business, Finance Department; National Bureau of Economic Research (NBER)
Francesco A. Franzoni
University of Lugano; Swiss Finance Institute
University of Pennsylvania - The Wharton School
April 17, 2014
Charles A. Dice Center Working Paper No. 2011-20
Fisher College of Business Working Paper No. 2011-03-20
Swiss Finance Institute Research Paper No. 11-66
AFA 2013 San Diego Meetings Paper
We study whether exchange traded funds (ETFs) — an asset of increasing importance — impact the volatility of their underlying stocks. Using identification strategies based on the mechanical variation in ETF ownership, we present evidence that stocks owned by ETFs exhibit significantly higher intraday and daily volatility. We estimate that an increase of one standard deviation in ETF ownership is associated with an increase of 16% in daily stock volatility. The driving channel appears to be arbitrage activity between ETFs and the underlying stocks. Consistent with this view, the effects are stronger for stocks with lower bid-ask spread and lending fees. Finally, the evidence that ETF ownership increases stock turnover suggests that ETF arbitrage adds a new layer of trading to the underlying securities.
Number of Pages in PDF File: 49
Keywords: ETFs, stocks, volatility, mispricing, fund flow
JEL Classification: G12, G14, G15working papers series
Date posted: December 2, 2011 ; Last revised: April 18, 2014
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