Exchange Traded Funds and Stock Market Volatility
59 Pages Posted: 11 Feb 2015 Last revised: 24 Jul 2016
Date Written: May 28, 2016
This study investigates the relationship between the volatility of stock market indexes and the trading volumes of their Exchange Traded Funds (ETFs). Using both OLS and GARCH approaches we demonstrate that the contemporaneous trading volume of S&P 500 ETFs is a key determinant of S&P 500 volatility at both monthly and daily frequencies. Vector autoregressive estimation on the other hand suggests a two-way Granger causality between S&P 500 volatility and the trading of S&P 500 ETFs. A replication analysis of other market indexes and the corresponding ETFs tracking these indexes confirms that these findings are robust.
Keywords: Exchange Traded Fund, Financial Market Index, Market Volatility, Trading Volume
JEL Classification: G12, G14
Suggested Citation: Suggested Citation