Abstract

http://ssrn.com/abstract=1967599
 
 

References (44)



 
 

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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

October 1, 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:     
An ongoing debate in finance centers on the impact of derivatives on the efficiency of prices of the underlying securities. The paper contributes to this literature by studying whether exchange traded funds (ETFs) — an asset of increasing importance — affect the non-fundamental volatility of the stocks in their baskets. Using identification strategies based on the mechanical variation in ETF ownership, including regression discontinuity, we show that stocks owned by ETFs exhibit significantly higher intraday and daily volatility. Variance-ratio tests, as well as price reversals, suggest that the mean-reverting component of stock prices is inflated by ETF ownership. We estimate that an increase of one standard deviation in ETF ownership is associated with an increase of 19% in intraday stock volatility. Our evidence suggests that ETFs attract a new layer of demand shocks to the stock market due to their high liquidity.

Number of Pages in PDF File: 62

Keywords: ETFs, volatility, arbitrage, fund flows

JEL Classification: G12, G14, G15

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Date posted: December 2, 2011 ; Last revised: October 14, 2014

Suggested Citation

Ben-David, Itzhak and Franzoni, Francesco A. and Moussawi, Rabih, Do ETFs Increase Volatility? (October 1, 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. 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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