Abstract

http://ssrn.com/abstract=2158361
 
 

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When the Bellwether Dances to Noise: Evidence from Exchange-Traded Funds


Zhi Da


University of Notre Dame - Mendoza College of Business

Sophie Shive


University of Notre Dame - Department of Finance

August 1, 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 nd 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 fi xed eft ects. The eff ect is stronger among small and illiquid stocks and during market turbulence. An examination of delay measures and mutual-fund-flow-induced price pressure suggests that at least some ETF-driven return comovement is excessive. In other words, ETFs may reduce diversi cation, the very bene t they were designed to facilitate.

Number of Pages in PDF File: 47

Keywords: exchange-traded funds, correlation

JEL Classification: G14, G23

working papers series


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Date posted: October 8, 2012 ; Last revised: August 6, 2013

Suggested Citation

Da, Zhi and Shive, Sophie, When the Bellwether Dances to Noise: Evidence from Exchange-Traded Funds (August 1, 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
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