Charles A. Dice Center Working Paper No. 2016-22
35 Pages Posted: 8 Nov 2016 Last revised: 11 Nov 2016
Date Written: October 1, 2016
Over two decades, ETFs have become one of the most popular investment vehicle among retail and professional investors due to their low transaction costs and high liquidity, taking market share from traditional investment vehicles such as mutual funds and index futures. Research has shown that in addition to the benefits of enhanced price discovery, ETFs add noise to the market: prices of underlying securities have higher volatility, greater price reversals, and higher correlation with the index. Arbitrage activity is a necessary component in minimizing the price discrepancy between ETFs and the underlying securities. During turbulent market episodes, however, arbitrage is limited and ETF prices diverge from those of the underlying securities.
Keywords: ETFs, Mutual Funds, Investment Managers, Volatility, Arbitrage, Fund Flows
JEL Classification: G12, G14, G15
Suggested Citation: Suggested Citation
Ben-David, Itzhak and Franzoni, Francesco A. and Moussawi, Rabih, Exchange Traded Funds (ETFs) (October 1, 2016). Charles A. Dice Center Working Paper No. 2016-22; Fisher College of Business Working Paper No. 2016-03-022; Swiss Finance Institute Research Paper No. 16-64. Available at SSRN: https://ssrn.com/abstract=2865734