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Exchange Traded Funds and Asset Return Correlations

56 Pages Posted: 8 Oct 2012 Last revised: 15 Mar 2016

Zhi Da

University of Notre Dame - Mendoza College of Business

Sophie Shive

University of Notre Dame - Department of Finance

Date Written: March 1, 2016

Abstract

We provide novel evidence supporting the notion that arbitrageurs can contribute to return comovement via ETF arbitrage. Using a large sample of U.S. equity ETF holdings, we document the link between measures of ETF activity and return comovement at both the fund and the stock levels, after controlling for a host of variables and fixed effects and by exploiting the “discontinuity” between stock indices. The effect is also stronger among small and illiquid stocks. An examination of ETF return autocorrelations and stock lagged beta provides evidence for price reversal, suggesting that some ETF-driven return comovement may be excessive.

Keywords: exchange-traded funds, correlation

JEL Classification: G14, G23

Suggested Citation

Da, Zhi and Shive, Sophie, Exchange Traded Funds and Asset Return Correlations (March 1, 2016). Available at SSRN: https://ssrn.com/abstract=2158361 or http://dx.doi.org/10.2139/ssrn.2158361

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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