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Exchange Traded Funds (ETFs)

Author

Listed:
  • Itzhak Ben-David

    (Ohio State University and National Bureau of Economic Research (NBER))

  • Francesco A. Franzoni

    (University of Lugano and Swiss Finance Institute)

  • Rabih Moussawi

    (Villanova University and University of Pennsylvania)

Abstract

Over two decades, ETFs have become one of the most popular investment vehicle among retail and professional investors due to their low transaction costs and high liquidity, taking market share from traditional investment vehicles such as mutual funds and index futures. Research has shown that in addition to the benefits of enhanced price discovery, ETFs add noise to the market: prices of underlying securities have higher volatility, greater price reversals, and higher correlation with the index. Arbitrage activity is a necessary component in minimizing the price discrepancy between ETFs and the underlying securities. During turbulent market episodes, however, arbitrage is limited and ETF prices diverge from those of the underlying securities.

Suggested Citation

  • Itzhak Ben-David & Francesco A. Franzoni & Rabih Moussawi, 2016. "Exchange Traded Funds (ETFs)," Swiss Finance Institute Research Paper Series 16-64, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1664
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    References listed on IDEAS

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    More about this item

    Keywords

    ETFs; Mutual Funds; Investment Managers; Volatility; Arbitrage; Fund Flows;
    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
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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