Working Paper: NBER ID: w20071
Authors: Itzhak Bendavid; 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.
Keywords: ETFs; volatility; arbitrage; financial markets; institutional investors
JEL Codes: G12; G14; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ETF flows (F38) | stock volatility (G17) |
| ETF ownership (G23) | nonfundamental volatility (G19) |
| ETF ownership (G23) | daily stock volatility (G17) |
| ETF ownership (G23) | intraday stock volatility (G17) |
| ETF ownership (G23) | stock turnover (C69) |