Do Exchange‐Traded Fund Flows Increase the Volatility of the Underlying Index? Evidence from the Emerging Market in China

24 Pages Posted: 7 Mar 2019

See all articles by Hua Wang

Hua Wang

Zhongnan University of Economics and Law - School of Accounting

Liao Xu

Jiangxi University of Finance and Economics

Date Written: March 2019

Abstract

Studying 70 Chinese equity exchange‐traded funds (ETFs), we show that daily ETF flows significantly increase both the total volatility and the fundamental volatility of the underlying index on the next trading day. More specifically, it is the forward‐looking flow component which captures APs’ share creation/redemption activities beyond their role of market makers that can significantly predict the two types of volatility. Moreover, ETF arbitrage (ETF's information share) enhances the effect of forward‐looking flows on the total volatility (fundamental volatility) of the index. Furthermore, the relationships between forward‐looking flows and the two types of index volatility show a two‐way contagion.

Keywords: Exchange‐traded fund, Fund flows, Trading volume, Stock market volatility, Efficient price

Suggested Citation

Wang, Hua and Xu, Liao, Do Exchange‐Traded Fund Flows Increase the Volatility of the Underlying Index? Evidence from the Emerging Market in China (March 2019). Accounting & Finance, Vol. 58, Issue 5, pp. 1525-1548, 2019. Available at SSRN: https://ssrn.com/abstract=3347973 or http://dx.doi.org/10.1111/acfi.12437

Hua Wang (Contact Author)

Zhongnan University of Economics and Law - School of Accounting ( email )

182# Nanhu Avenue
Wuhan, 430073
China

Liao Xu

Jiangxi University of Finance and Economics ( email )

South Lushan Road
Nanchang, Jiangxi 330013
China

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