Abstract

http://ssrn.com/abstract=1967599
 
 

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Do ETFs Increase Volatility?


Itzhak Ben-David


Ohio State University - Fisher College of Business, Finance Department; National Bureau of Economic Research (NBER)

Francesco A. Franzoni


University of Lugano; Swiss Finance Institute

Rabih Moussawi


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

Abstract:     
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, G15

working papers series


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Date posted: December 2, 2011 ; Last revised: April 18, 2014

Suggested Citation

Ben-David, Itzhak and Franzoni, Francesco A. and Moussawi, Rabih, Do ETFs Increase Volatility? (April 17, 2014). AFA 2013 San Diego Meetings Paper; Fisher College of Business Working Paper No. 2011-03-20; Swiss Finance Institute Research Paper No. 11-66; AFA 2013 San Diego Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1967599 or http://dx.doi.org/10.2139/ssrn.1967599

Contact Information

Itzhak Ben-David (Contact Author)
Ohio State University - Fisher College of Business, Finance Department ( email )
2100 Neil Avenue
Fisher 700D
Columbus, OH 43210-1144
United States
773 988 1353 (Phone)
HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/index.htm

National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/
Francesco A. Franzoni
University of Lugano ( email ) ( email )
University of Lugano
Via G. Buffi 13
Lugano, 6904
Switzerland
Swiss Finance Institute ( email ) ( email )
University of Lugano
Via G. Buffi 13
Lugano, 6904
Switzerland
Rabih Moussawi
University of Pennsylvania - The Wharton School ( email )
3733 Spruce Street
216 Vance Hall
Philadelphia, PA 19104-6365
United States
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