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Impact of ETF inception on the valuation and trading of component stocks

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  • Jeff Madura
  • Thanh Ngo
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    Abstract

    While exchange-traded funds (ETFs) are being created at a rapid rate, there is very limited research on how they affect the component stocks that they contain. We find that in response to the inception of ETFs, there are positive and significant valuation effects on the dominant component stocks (defined as the 10 largest stocks in each ETF). The variation in the valuation effects is associated with stock-specific characteristics, such as relatively low liquidity and the size of the ETF in which the component stock is contained. The characteristics of the component stocks that experience more favourable valuation effects at the inception of ETFs also lead to a more pronounced increase in their trading volume following their ETF's inception. The increase in trading volume is especially pronounced for those component stocks that are relatively small, have relatively low levels of liquidity, and are contained within relatively large ETFs.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/09603100701335424
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

    Volume (Year): 18 (2008)
    Issue (Month): 12 ()
    Pages: 995-1007

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    Handle: RePEc:taf:apfiec:v:18:y:2008:i:12:p:995-1007

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    Web page: http://www.tandfonline.com/RAFE20

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    Cited by:
    1. Florian Hauser & Bob Kaempff, 2013. "Evolution of trading strategies in a market with heterogeneously informed agents," Journal of Evolutionary Economics, Springer, vol. 23(3), pages 575-607, July.
    2. Shaen Corbet & Cian Twomey, 2014. "Have Exchange Traded Funds Influenced Commodity Market Volatility?," International Journal of Economics and Financial Issues, Econjournals, vol. 4(2), pages 323-335.

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