Do ETFs Increase the Commonality in Liquidity of Underlying Stocks?

46 Pages Posted: 13 Nov 2017  

Vikas Agarwal

Georgia State University; University of Cologne - Centre for Financial Research (CFR)

Paul Hanouna

Villanova University - School of Business

Rabih Moussawi

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

Christof W. Stahel

U.S. Securities and Exchange Commission - Division of Economic and Risk Analysis

Date Written: April 26, 2018

Abstract

We examine the impact of ETF ownership on the commonality in liquidity of underlying stocks, while controlling for the effect of other institutional ownership. Analyses using either aggregate ETF ownership at the stock level or common ETF ownership at the stock pair level indicate that ETF ownership significantly increases commonality. We show that greater arbitrage opportunities and activity are associated with a larger effect of ETF ownership on commonality. We use two quasi natural experiments that exploit ETF trading halts and the reconstitution of Russell indexes, to establish causality. Our results suggest that ETFs reduce investors’ ability to diversify liquidity shocks.

Keywords: Exchange-Traded Funds (ETFs), Liquidity, Commonality, Arbitrage, Trading Halts, Index Reconstitution

JEL Classification: G10, G12, G14, G23

Suggested Citation

Agarwal, Vikas and Hanouna, Paul and Moussawi, Rabih and Stahel, Christof W., Do ETFs Increase the Commonality in Liquidity of Underlying Stocks? (April 26, 2018). Fifth Annual Conference on Financial Market Regulation. Available at SSRN: https://ssrn.com/abstract=3070550 or http://dx.doi.org/10.2139/ssrn.3070550

Vikas Agarwal

Georgia State University ( email )

35 Broad Street,
Suite 1221
Atlanta, GA 30303-3083
United States
404-413-7326 (Phone)
404-413-7312 (Fax)

HOME PAGE: http://www.gsu.edu/~fncvaa

University of Cologne - Centre for Financial Research (CFR)

Albertus-Magnus Platz
Cologne, 50923
Germany

Paul E. Hanouna

Villanova University - School of Business ( email )

800 Lancaster Avenue
Villanova, PA 19085-1678
United States

Rabih Moussawi

Villanova University - Department of Finance ( email )

800 E Lancaster Ave
Bartley Hall, 1003
Villanova, PA 19085
United States

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

University of Pennsylvania - The Wharton School ( email )

United States

Christof W. Stahel (Contact Author)

U.S. Securities and Exchange Commission - Division of Economic and Risk Analysis ( email )

United States
+1.202.551.6623 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
83
rank
270,825
Abstract Views
334
PlumX