Do Etfs Increase Volatility?

59 Pages Posted: 28 Apr 2014 Last revised: 8 May 2014

See all articles by Itzhak Ben-David

Itzhak Ben-David

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)

Francesco A. Franzoni

USI Lugano; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)

Rabih Moussawi

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

Multiple version iconThere are 2 versions of this paper

Date Written: April 2014

Abstract

We study whether exchange traded funds (ETFs)--an asset of increasing importance--impact the volatility of their underlying stocks. Using identification strategies based on the mechanical variation in ETF ownership, we present evidence that stocks owned by ETFs exhibit significantly higher intraday and daily volatility. We estimate that an increase of one standard deviation in ETF ownership is associated with an increase of 16% in daily stock volatility. The driving channel appears to be arbitrage activity between ETFs and the underlying stocks. Consistent with this view, the effects are stronger for stocks with lower bid-ask spread and lending fees. Finally, the evidence that ETF ownership increases stock turnover suggests that ETF arbitrage adds a new layer of trading to the underlying securities.

Suggested Citation

Ben-David, Itzhak and Franzoni, Francesco A. and Moussawi, Rabih, Do Etfs Increase Volatility? (April 2014). NBER Working Paper No. w20071. Available at SSRN: https://ssrn.com/abstract=2430066

Itzhak Ben-David (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

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

National Bureau of Economic Research (NBER) ( email )

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

Francesco A. Franzoni

USI Lugano ( email )

Via G. Buffi 13
Lugano, 6904
Switzerland

Swiss Finance Institute

Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Rabih Moussawi

Villanova University - Department of Finance ( email )

800 E Lancaster Ave
Bartley Hall, 2051
Villanova, PA 19085
United States

HOME PAGE: http://www.homepage.villanova.edu/rabih.moussawi

University of Pennsylvania - The Wharton School ( email )

United States

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