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Do ETFs Increase Volatility?

Author

Listed:
  • Itzhak Ben-David
  • Francesco Franzoni
  • Rabih Moussawi

Abstract

We study whether exchange traded funds (ETFs)--an asset of increasing importance--impact the volatility of their underlying stocks. Using identification strategies based on the mechanical variation in ETF ownership, we present evidence that stocks owned by ETFs exhibit significantly higher intraday and daily volatility. We estimate that an increase of one standard deviation in ETF ownership is associated with an increase of 16% in daily stock volatility. The driving channel appears to be arbitrage activity between ETFs and the underlying stocks. Consistent with this view, the effects are stronger for stocks with lower bid-ask spread and lending fees. Finally, the evidence that ETF ownership increases stock turnover suggests that ETF arbitrage adds a new layer of trading to the underlying securities.

Suggested Citation

  • Itzhak Ben-David & Francesco Franzoni & Rabih Moussawi, 2014. "Do ETFs Increase Volatility?," NBER Working Papers 20071, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:20071
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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The World of ETFs
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2016-08-01 16:56:32

    Citations

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    Cited by:

    1. Shank, Corey A. & Vianna, Andre C., 2016. "Are US-Dollar-Hedged-ETF investors aggressive on exchange rates? A panel VAR approach," Research in International Business and Finance, Elsevier, vol. 38(C), pages 430-438.
    2. repec:eee:quaeco:v:65:y:2017:i:c:p:137-145 is not listed on IDEAS
    3. Pan, Kevin & Zeng, Yao, 2017. "ETF arbitrage under liquidity mismatch," ESRB Working Paper Series 59, European Systemic Risk Board.
    4. Cheng, Si & Massa, Massimo & Zhang, Hong, 2017. "The Unexpected Activeness of Passive Investors: A World-Wide Analysis of ETFs," CEPR Discussion Papers 11988, C.E.P.R. Discussion Papers.
    5. repec:bla:finmgt:v:47:y:2018:i:1:p:55-79 is not listed on IDEAS
    6. Chacko, George & Das, Sanjiv & Fan, Rong, 2016. "An index-based measure of liquidity," Journal of Banking & Finance, Elsevier, vol. 68(C), pages 162-178.
    7. repec:eee:corfin:v:52:y:2018:i:c:p:143-167 is not listed on IDEAS
    8. repec:eee:jfinec:v:125:y:2017:i:3:p:537-560 is not listed on IDEAS
    9. Christophe Hurlin & Gregoire Iseli & Christophe Pérignon & Stanley Yeung, 2014. "The Counterparty Risk Exposure of ETF Investors," Working Papers halshs-01023807, HAL.

    More about this item

    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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