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

See all articles by Laurent Deville

Laurent Deville

EDHEC Business School

Carole Gresse

Université Paris-Dauphine, PSL

Béatrice de Séverac

Université Paris Ouest Nanterre La Défense

Multiple version iconThere are 2 versions of this paper

Date Written: March 14, 2014

Abstract

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

Deville, Laurent and Gresse, Carole and de Séverac, Béatrice, Direct and Indirect Effects of Index ETFs on Spot-Futures Pricing and Liquidity: Evidence from the CAC 40 Index (March 14, 2014). European Financial Management, 20(2), 352-373, 2014.. Available at SSRN: https://ssrn.com/abstract=1903898 or http://dx.doi.org/10.2139/ssrn.1903898

Laurent Deville

EDHEC Business School ( email )

58 rue du Port
Lille, 59046
France

Carole Gresse (Contact Author)

Université Paris-Dauphine, PSL ( email )

DRM
Pôle Universitaire Léonard de Vinci
Paris La Défense cedex, 92916
France
+33 (0)1 41 16 76 15 (Phone)
+33 (0)1 41 16 76 37 (Fax)

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

Béatrice De Séverac

Université Paris Ouest Nanterre La Défense ( email )

200 avenue de la République,
Nanterre cedex, Nanterre 92001
France

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