Exchange Traded Funds and Stock Market Volatility

Liao Xu and Xiangkang Yin

International Review of Finance, 2017, vol. 17, issue 4, 525-560

Abstract: This study investigates the relationship between the volatility of stock market indexes and the trading volumes of their exchange traded funds (ETFs). Using both ordinary least squares and generalized autoregressive conditional heteroskedasticity approaches, we demonstrate that the contemporaneous trading volume of S&P 500 ETFs is a key determinant of S&P 500 volatility at both monthly and daily frequencies. Vector autoregressive estimation on the other hand suggests a two†way Granger causality between S&P 500 volatility and the trading of S&P 500 ETFs. A replication analysis of other market indexes and the corresponding ETFs tracking these indexes confirms that these findings are robust.

Date: 2017
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International Review of Finance is currently edited by Bruce D. Grundy, Naifu Chen, Ming Huang, Takao Kobayashi and Sheridan Titman

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