Exchange-Traded Funds and Equity Return Correlations

Da, Zhi; Shive, Sophie

doi:10.2139/ssrn.2158361

Abstract

References (28)

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Exchange-Traded Funds and Equity Return Correlations

Zhi Da

University of Notre Dame - Mendoza College of Business

University of Notre Dame - Department of Finance

April 2013

Abstract:
We provide novel evidence that arbitrageurs can exacerbate return comovement via ETF arbitrage. Using a large sample of U.S. equity ETF holdings, we find a strong relation between measures of ETF activity and return comovement at both the fund and the stock levels, after controlling for a host of variables and fixed effects. The effect is stronger among small and illiquid stocks and during market turbulence. An examination of delay measures and sentiment betas suggests that at least some ETF-driven return comovement is excessive. In other words, ETFs may reduce diversification, the very benefit they were designed to facilitate.

Number of Pages in PDF File: 52

Keywords: exchange-traded funds, correlation

JEL Classification: G14, G23

working papers series

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Date posted: October 8, 2012 ; Last revised: April 7, 2013

Suggested Citation

Da, Zhi and Shive, Sophie, Exchange-Traded Funds and Equity Return Correlations (April 2013). Available at SSRN: http://ssrn.com/abstract=2158361 or http://dx.doi.org/10.2139/ssrn.2158361

Contact Information

Zhi Da University of Notre Dame - Mendoza College of Business ( email ) Notre Dame, IN 46556-5646 United States
Sophie Shive (Contact Author) University of Notre Dame - Department of Finance ( email ) P.O. Box 399 Notre Dame, IN 46556-0399 United States

Abstract

References (28)

Exchange-Traded Funds and Equity Return Correlations

Zhi Da

Sophie Shive

Date posted: October 8, 2012 ; Last revised: April 7, 2013

Suggested Citation

Contact Information

Zhi Da

Sophie Shive (Contact Author)