Exchange Traded Funds, Liquidity, and Market Volatility

37 Pages Posted: 29 Sep 2012 Last revised: 13 Jan 2017

See all articles by Timothy A. Krause

Timothy A. Krause

Penn State Behrend

Sina Ehsani

Northern Illinois University

Donald D. Lien

University of Texas at San Antonio - College of Business - Department of Economics

Date Written: January 11, 2013

Abstract

Given the exponential growth in ETF trading over the past decade, we consider the proposition that trading in ETFs transmits volatility to their largest component stocks and thus to the stock market in general. We find empirical support for this proposition, since volatility spillovers from ETFs to component stocks are significant, as well as increasing in liquidity and the proportion of each stock held by the fund. The results are consistent with a positive volume-volatility relation and trading-based explanations of volatility, and are relevant to market participants and regulators, since ETFs may contribute to stock market volatility via arbitrage activity and the impounding of non-fundamental information.

Keywords: Exchange Traded Fund, ETF, Volatility Spillover, Liquidity, Volume

JEL Classification: G12, G14

Suggested Citation

Krause, Timothy A. and Ehsani, Sina and Lien, Donald, Exchange Traded Funds, Liquidity, and Market Volatility (January 11, 2013). Applied Financial Economics (2013). Available at SSRN: https://ssrn.com/abstract=2153903 or http://dx.doi.org/10.2139/ssrn.2153903

Timothy A. Krause (Contact Author)

Penn State Behrend ( email )

Black School of Business
5101 Station Road
Erie, PA 16563
United States
814-898-6236 (Phone)

HOME PAGE: http://https://psbehrend.psu.edu/school-of-business/faculty-staff-directory/finance/timothy-krause

Sina Ehsani

Northern Illinois University ( email )

Chicago, IL 60115
United States

Donald Lien

University of Texas at San Antonio - College of Business - Department of Economics ( email )

6900 North Loop 1604 West
San Antonio, TX 78249
United States
210-458-4313 (Phone)
210-458-4308 (Fax)

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