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Do ETFs Increase Volatility?

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

Itzhak Ben-David

Ohio State University - Fisher College of Business, Finance Department; National Bureau of Economic Research (NBER)

Francesco A. Franzoni

USI Lugano; Swiss Finance Institute

Rabih Moussawi

Villanova University - Department of Finance; University of Pennsylvania - The Wharton School

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 - Fisher College of Business, Finance Department ( email )

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

HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/index.htm

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 Franzoni

USI Lugano ( email )

Via G. Buffi 13
Lugano, 6904
Switzerland

Swiss Finance Institute

Switzerland

Rabih Moussawi

Villanova University - Department of Finance ( email )

800 E Lancaster Ave
Bartley Hall, 1003
Villanova, PA 19085
United States

University of Pennsylvania - The Wharton School ( email )

United States

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