Exchange-traded funds, capital market efficiency and systemic risk

Jay Cullen

Chapter 20 in Research Handbook on Global Capital Markets Law, 2023, pp 318-333 from Edward Elgar Publishing

Abstract: Exchange-traded funds (ETFs) are by common consensus one of the most innovative financial products to have been introduced to financial markets over the past few decades. This chapter argues that the principal risk implication from the increased investment in ETFs is through compounding informational gaps in the capital market pricing mechanism. The framework used in this chapter builds on the classic analysis of securities market efficiency mechanisms by Professors Gilson and Kraakman, which is arguably the most influential law and economics exposition of this topic in the field. The analysis finds that the passive investment modality which indirectly drives the expanding ETF universe may contribute to informational deficits, and thereby market mispricing. In some circumstances, such information gaps have the potential to generate system-wide instability.

Keywords: Economics and Finance; Law - Academic (search for similar items in EconPapers)
Date: 2023
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