ETF Arbitrage and International Correlation

69 Pages Posted: 10 Dec 2018

See all articles by Ilias Filippou

Ilias Filippou

Washington University in St. Louis - John M. Olin Business School; University of Warwick

Arie Eskenazi Gozluklu

University of Warwick

Hari Rozental

University of Warwick, Warwick Business School, Students

Date Written: November 19, 2018

Abstract

Assets under management of exchange-traded funds (ETF) have been growing significantly, yet the majority of ETF trades still occur on U.S. exchanges. We show that investment decisions of both institutional and retail investors when trading international country ETFs are mostly driven by shocks related to U.S. fundamentals, measured by VIX, rather than local country risks. Investors react only to negative news about local economies. When U.S. economic uncertainty increases, investors leave the country ETF market and switch to Cash ETF products. We demonstrate that ETF arbitrage mechanism is one of the key channels through which U.S. shocks propagate to local economies leading to increased return correlation with the U.S. market both in time-series and cross-sectional dimensions. We find that countries with stronger ETF price-discovery and lower limits to arbitrage tend to have a higher comovement with the U.S. market.

Keywords: ETFs, correlation with the U.S., institutional and retail investors, VIX.

JEL Classification: G11, G15.

Suggested Citation

Filippou, Ilias and Gozluklu, Arie Eskenazi and Rozental, Hari, ETF Arbitrage and International Correlation (November 19, 2018). Available at SSRN: https://ssrn.com/abstract=3287417 or http://dx.doi.org/10.2139/ssrn.3287417

Ilias Filippou (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

University of Warwick ( email )

Scarman Road
West Midlands, CV4 7AL
United Kingdom
+44(0)2476522393 (Phone)

HOME PAGE: http://sites.google.com/site/ifilippou1/

Arie Eskenazi Gozluklu

University of Warwick ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

HOME PAGE: http://www.arieskenazi.com

Hari Rozental

University of Warwick, Warwick Business School, Students ( email )

West Midlands, CV4 7AL
United Kingdom

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