Does ETF activity reduce stock price volatility—Evidence from the A-share market

Xiaokang Zhao, Guanghe Ran, Bing Shen and Xiaolong Li

Applied Economics, 2022, vol. 54, issue 52, 6036-6053

Abstract: The scale of global exchange-traded funds (ETFs) has shown an explosive growth trend; however, research on the impact of ETF activity on the stock market is still in its infancy. While ETFs increase the volatility of the U.S. stock market, there is scant literature on the impact of ETF activity on the volatility of the emerging A-share market. Owing to the large differences in the institutional and investor structure of the A-share market, will there be significant differences in the impact of ETFs on the volatility of the A-share market? This study found that ETF activity significantly reduced idiosyncratic volatility but increased systemic volatility. Since the decrease in idiosyncratic volatility was greater than the increase in systemic volatility, the overall volatility showed a downward trend. Further research on the impact mechanism showed that the idiosyncratic volatility of the A-share market was positively correlated with noise information. ETF activity reduced idiosyncratic volatility by reducing the noise information. Systematic volatility was positively correlated with faster information integration speed. ETF activity improved systematic volatility by improving information integration speed. This study elucidated the impact of ETF activity on stock price volatility under different market backgrounds.

Date: 2022
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DOI: 10.1080/00036846.2022.2056129

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