The Impact of ETF Index Inclusion on Stock Prices

54 Pages Posted: 6 Apr 2022 Last revised: 7 May 2023

See all articles by John Duffy

John Duffy

University of California, Irvine

Daniel Friedman

University of California, Santa Cruz - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Jean Paul Rabanal

University of Stavanger

Olga Rud

University of Stavanger

Date Written: May 24, 2022

Abstract

We report on a laboratory experiment examining how demand for ETF index products affects the prices and trading volume of assets. We compare an environment where the ETF index includes all assets in a market against an environment where a redundant asset is excluded from the index. We find that (i) subjects place significant value on the ETF index asset beyond the value of its constituent assets; (ii) there is a substantial index premium for included assets; and (iii) the index premium persists even when short-selling is permitted. The price increases of the constituent assets and of the ETF itself suggest that ETF products can distort markets to some degree.

Keywords: index premium, ETFs, experimental finance

JEL Classification: G11, G12, G14, C92

Suggested Citation

Duffy, John and Friedman, Daniel and Rabanal, Jean Paul and Rud, Olga, The Impact of ETF Index Inclusion on Stock Prices (May 24, 2022). Available at SSRN: https://ssrn.com/abstract=4061686 or http://dx.doi.org/10.2139/ssrn.4061686

John Duffy

University of California, Irvine ( email )

Department of Economics
3151 Social Science Plaza
Irvine, CA 92697
United States
949-824-8341 (Phone)

Daniel Friedman

University of California, Santa Cruz - Department of Economics ( email )

Social Sciences I
Santa Cruz, CA 95064
United States
831-459-4981 (Phone)
831-459-5900 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Jean Paul Rabanal

University of Stavanger ( email )

PB 8002
Stavanger, 4036
Norway

Olga Rud (Contact Author)

University of Stavanger ( email )

PB 8002
Stavanger, 4036
Norway

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