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ETF ownership and stock pricing efficiency: The role of ETF arbitrage

Author

Listed:
  • Chen, Guanhua
  • Liu, Xiangli
  • Liu, Xiao
  • Zhao, Zhihua

Abstract

This study investigates the effect of exchange-traded fund (ETF) ownership on the stock pricing efficiency in the Chinese market using a panel of stock-daily observations. Based on the ETF portfolio composition file (PCF) and the intraday trading data of stocks from 2012 to 2021, we estimate daily ETF holdings based on a new method and find that the increase in ETF ownership stimulates ETF arbitrage and intensifies the contagion of noise information from the ETF market to the stock market, reducing the pricing efficiency of the underlying stocks. We also employ the change of ETF trading policy from the Shenzhen Stock Exchange in 2019 as a quasi-natural experiment to alleviate the endogeneity issue. Our study proposes a new method to estimate ETF holdings and provides new evidence on the financial consequences of ETFs.

Suggested Citation

  • Chen, Guanhua & Liu, Xiangli & Liu, Xiao & Zhao, Zhihua, 2024. "ETF ownership and stock pricing efficiency: The role of ETF arbitrage," Finance Research Letters, Elsevier, vol. 62(PA).
    • Handle: RePEc:eee:finlet:v:62:y:2024:i:pa:s1544612324001387
    DOI: 10.1016/j.frl.2024.105108
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    More about this item

    Keywords

    ETF; Pricing efficiency; Arbitrage;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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