Do ETFs Increase Volatility?

By Itzhak Ben-David, Francesco A. Franzoni, Rabih Moussawi. Journal of Finance, 2018

439 citations recorded by the source corpus.

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.

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/fc73cf6707b89c8b4248e55093ae13c013f66cab

Citations in the corpus

• Inefficiencies in the Pricing of Exchange-Traded Funds (2017, neutral): “3 One exception is Ben-David et al. (2014), who used a broad cross section of ETFs but focused on a different research question and did not adjust for stale NAVs, which is a key issue when investigating ETF premiums.”