Do ETFs Increase Volatility?

145 Pages Posted: 2 Dec 2011 Last revised: 3 Dec 2017

See all articles by Itzhak Ben-David

Itzhak Ben-David

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)

Francesco A. Franzoni

Universita della Svizzera italiana (USI Lugano); Swiss Finance Institute; Centre for Economic Policy Research (CEPR)

Rabih Moussawi

Villanova University - Department of Finance; University of Pennsylvania

Multiple version iconThere are 2 versions of this paper

Date Written: November 30, 2017

Abstract

Due to their low trading costs, ETFs are potentially a catalyst for short-horizon liquidity traders. The liquidity shocks can propagate to the underlying securities through the arbitrage channel, and ETFs may increase the non-fundamental volatility of the securities in their baskets. We exploit exogenous changes in index membership and find that stocks with higher ETF ownership display significantly higher volatility. ETF ownership increases the negative autocorrelation in stock prices. The increase in volatility appears to introduce undiversifiable risk in prices, because stocks with high ETF ownership earn a significant risk premium of up to 56 basis points monthly.

Keywords: ETFs, volatility, arbitrage, fund flows

JEL Classification: G12, G14, G15

Suggested Citation

Ben-David, Itzhak and Franzoni, Francesco A. and Moussawi, Rabih, Do ETFs Increase Volatility? (November 30, 2017). Journal of Finance, Forthcoming, Fisher College of Business Working Paper No. 2011-03-20, Swiss Finance Institute Research Paper No. 11-66, AFA 2013 San Diego Meetings Paper, Charles A. Dice Center Working Paper No. 2011-20, Available at SSRN: https://ssrn.com/abstract=1967599 or http://dx.doi.org/10.2139/ssrn.1967599

Itzhak Ben-David (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Fisher 700D
Columbus, OH 43210-1144
United States
773 988 1353 (Phone)

HOME PAGE: http://https://u.osu.edu/ben-david.1/

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

Universita della Svizzera italiana (USI Lugano) ( email )

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Rabih Moussawi

Villanova University - Department of Finance ( email )

800 E Lancaster Ave
Bartley Hall, 2051
Villanova, PA 19085
United States

HOME PAGE: http://www.homepage.villanova.edu/rabih.moussawi

University of Pennsylvania ( email )

3733 Spruce Street
216 Vance Hall
Philadelphia, PA 19104-6301
United States

HOME PAGE: http://www.rabihmoussawi.com/

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
6,572
Abstract Views
37,069
Rank
1,965
PlumX Metrics