ETFs, Arbitrage, and Contagion
AbstractRecent literature suggests that trading by institutional investors may affect the first and second moments of returns. Elaborating on this intuition, we conjecture that arbitrageurs can propagate liquidity shocks between related markets. The paper provides evidence in this direction by studying Exchange Traded Funds (ETFs), an asset class that has gained paramount importance in recent years. We report that arbitrage activity occurs between ETFs and the underlying assets. Then, we show that ETFs increase the volatility of the underlying assets, and that the prices of the underlying assets are affected by shocks to ETFs. Finally, we present findings consistent with the idea that ETFs served as a conduit for shock propagation between the futures market and the equity market during the Flash Crash on May 6, 2010. Overall, our results suggest that arbitrage activity may induce contagion.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2011-20.
Date of creation: Dec 2011
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-01-03 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Cespa, Giovanni & Foucault, Thierry, 2011. "Learning from Prices, Liquidity Spillovers, and Market Segmentation," CEPR Discussion Papers 8350, C.E.P.R. Discussion Papers.
- Greenwood, Robin & Thesmar, David, 2011. "Stock price fragility," Journal of Financial Economics, Elsevier, vol. 102(3), pages 471-490.
- Denis Gromb & Dimitri Vayanos, 2010.
"Limits of Arbitrage: The State of the Theory,"
NBER Working Papers
15821, National Bureau of Economic Research, Inc.
- Joshua D. Coval & Erik Stafford, 2005.
"Asset Fire Sales (and Purchases) in Equity Markets,"
NBER Working Papers
11357, National Bureau of Economic Research, Inc.
- Coval, Joshua & Stafford, Erik, 2007. "Asset fire sales (and purchases) in equity markets," Journal of Financial Economics, Elsevier, vol. 86(2), pages 479-512, November.
- Basak, Suleyman & Pavlova, Anna, 2012.
"Asset Prices and Institutional Investors,"
CEPR Discussion Papers
9120, C.E.P.R. Discussion Papers.
- Cristina Cella & Andrew Ellul & Mariassunta Giannetti, .
"Investors’ Horizons and the Amplification of Market Shocks,"
FMG Discussion Papers
dp717, Financial Markets Group.
- Cristina Cella & Andrew Ellul & Mariassunta Giannetti, 2013. "Investors' Horizons and the Amplification of Market Shocks," Review of Financial Studies, Society for Financial Studies, vol. 26(7), pages 1607-1648.
- Cella, Cristina & Ellul, Andrew & Giannetti, Mariassunta, 2010. "Investors' horizons and the Amplification of Market Shocks," CEPR Discussion Papers 8083, C.E.P.R. Discussion Papers.
- Jeffrey Wurgler, 2010. "On the Economic Consequences of Index-Linked Investing," NBER Working Papers 16376, National Bureau of Economic Research, Inc.
- Pontiff, Jeffrey, 2006. "Costly arbitrage and the myth of idiosyncratic risk," Journal of Accounting and Economics, Elsevier, vol. 42(1-2), pages 35-52, October.
- Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
- Allaudeen Hameed & Wenjin Kang & S. Viswanathan, 2010. "Stock Market Declines and Liquidity," Journal of Finance, American Finance Association, vol. 65(1), pages 257-293, 02.
- Scott W. Barnhart & Stuart Rosenstein, 2010. "Exchange-Traded Fund Introductions and Closed-End Fund Discounts and Volume," The Financial Review, Eastern Finance Association, vol. 45(4), pages 973-994, November.
- Lee, Charles M C & Ready, Mark J, 1991. " Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-46, June.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.