Do ETFs Increase the Comovements of Their Underlying Assets? Evidence from a Switch in ETF Replication Technique

43 Pages Posted: 19 Apr 2022 Last revised: 27 Oct 2022

See all articles by Thomas Marta

Thomas Marta

Wilfrid Laurier University - Lazaridis School of Business and Economics

Fabrice Riva

Université Paris-Dauphine, PSL Research University

Date Written: April 9, 2022

Abstract

We investigate the impact of Exchange-Traded Funds (ETFs) on their constituent securities. The analysis is performed using a novel identification which exploits the switch from synthetic to physical replication of a large French ETF. We find that, after the switch, constituent stocks experience greater commonality, both in returns and in liquidity. For both the full sample of ETF constituents and the least liquid ETF constituents, an increasing part of the variation in individual stock returns or liquidity is explained by market-wide variations. We present evidence that ETF arbitrage is the transmission mechanism of the comovements. Moreover, we show that the comovements do not appear excessive.

Keywords: ETFs, commonality

JEL Classification: G12, G14

Suggested Citation

Marta, Thomas and Riva, Fabrice, Do ETFs Increase the Comovements of Their Underlying Assets? Evidence from a Switch in ETF Replication Technique (April 9, 2022). Université Paris-Dauphine Research Paper No. 4079302, Proceedings of the EUROFIDAI-ESSEC Paris December Finance Meeting 2022, Available at SSRN: https://ssrn.com/abstract=4079302 or http://dx.doi.org/10.2139/ssrn.4079302

Thomas Marta (Contact Author)

Wilfrid Laurier University - Lazaridis School of Business and Economics ( email )

64 University Ave W
Waterloo, Ontario N2L 3C7
Canada

HOME PAGE: http://https://sites.google.com/view/thomasmarta/home

Fabrice Riva

Université Paris-Dauphine, PSL Research University ( email )

Place du Maréchal de Tassigny
Paris, Cedex 16 75775
France

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