Impact of leveraged ETF trading on the market quality of component stocks

Mingsheng Li and Xin Zhao

The North American Journal of Economics and Finance, 2014, vol. 28, issue C, 90-108

Abstract: We investigate the effect of leveraged ETF trading on the trading activity and market quality of their component stocks. The results show that both quoted and effective spreads of component stocks increase about 0.2–3.0 basis points after the inception of leveraged ETFs, while other liquidity measures do not show significant changes. The trading volume of component stocks is positively and significantly correlated with the trading volume of leveraged ETFs, but the volatility of component stocks is not affected by ETF trading either at the daily level or during the last hour of trading. In addition, the volatility of component stocks decreases slightly after ETF inception. These findings do not support the previous claim that the trading of leveraged ETFs increases price volatility of component stocks.

Keywords: Exchange traded funds; ETFs; Leveraged ETFs; Liquidity; Market volatility (search for similar items in EconPapers)
JEL-codes: G14 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:28:y:2014:i:c:p:90-108

DOI: 10.1016/j.najef.2014.02.001

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