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Do ETFs increase the comovements of their underlying assets? Evidence from a switch in ETF replication technique

Riva, Fabrice; Marta, Thomas (2022), Do ETFs increase the comovements of their underlying assets? Evidence from a switch in ETF replication technique, EUROFIDAI-ESSEC Paris December Finance Meeting 2022, 2022-12, Paris, France

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Type
Communication / Conférence
Date
2022
Conference title
EUROFIDAI-ESSEC Paris December Finance Meeting 2022
Conference date
2022-12
Conference city
Paris
Conference country
France
Pages
43
Metadata
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Author(s)
Riva, Fabrice
Dauphine Recherches en Management [DRM]
Marta, Thomas
Abstract (EN)
We investigate the impact of Exchange-Traded Funds (ETFs) on the comovements of their constituent securities using a novel identification which exploits the switch from synthetic to physical replication of a large French ETF. After the switch, constituent stocks experience greater commonality, in both returns and liquidity. For both the full sample of ETF constituents and the least liquid ETF constituents, a larger part of the variation in individual stock returns or liquidity is explained by market-wide variations. We present evidence that ETF arbitrage is the transmission mechanism of the comovements. Moreover, we show that the comovements do not appear excessive.
Subjects / Keywords
ETFs; Commonality
JEL
G10 - General
G20 - General