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The effect of ETFs on financial markets: a literature review

Luca J. Liebi ()
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Luca J. Liebi: Swiss Institute of Banking and Finance, University of St. Gallen

Financial Markets and Portfolio Management, 2020, vol. 34, issue 2, No 2, 165-178

Abstract: Abstract Exchange-traded funds (ETFs) belong to the fastest growing investment products worldwide. Within 15 years, total assets invested in ETFs have twenty-folded, reaching over $3.7 trillion at the end of 2018. Increasing demand for passive investments, coupled with high liquidity and low transaction costs, are key advantages of ETFs compared to their closest substitutes such as traditional index funds. Besides the continuous growth of ETFs, the Flash Crash in 2010 triggered detailed investigations by regulators on how ETFs affect the financial market. This literature review provides a broad overview of recent academic studies analyzing the effect of ETFs on liquidity, price discovery, volatility, and comovement of the underlying securities.

Keywords: Exchange-traded funds; Liquidity; Price discovery; Volatility; Comovement (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s11408-020-00349-1

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