Direct and Indirect Effects of Index ETFs on Spot-Futures Pricing and Liquidity: Evidence from the CAC 40 Index
European Financial Management, 20(2), 352-373, 2014.
38 Pages Posted: 3 Aug 2011 Last revised: 15 Mar 2014
Date Written: March 14, 2014
This paper investigates how the introduction of an index security directly or indirectly impacts the underlying-index spot-futures pricing. Using intraday data for financial instruments related to the CAC 40 index, we do not find that the spot-futures price efficiency improvement observed after ETF introduction is explained either by the direct effect of ETF shares being used in arbitrage trades or by the indirect effect of ETF trading improving the liquidity of index stocks in the short run. Some of our findings suggest that the efficiency improvement could rather result from a structural change in the way index traders distribute across index markets, with the ETF market absorbing the liquidity demand from some hedgers or passive index traders.
Keywords: Futures, Exchange-Traded Fund, ETF, Efficiency, Arbitrage, Liquidity
JEL Classification: G12, G13, G14
Suggested Citation: Suggested Citation