ETFs, Arbitrage, and Contagion

Itzhak Ben-David, Francesco Franzoni and Rabih Moussawi
Additional contact information
Francesco Franzoni: Swiss Finance Institute and University of Lugano
Rabih Moussawi: University of PA

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: Recent literature suggests that trading by institutional investors may affect the first and second moments of returns. Elaborating on this intuition, we conjecture that arbitrageurs can propagate liquidity shocks between related markets. The paper provides evidence in this direction by studying Exchange Traded Funds (ETFs), an asset class that has gained paramount importance in recent years. We report that arbitrage activity occurs between ETFs and the underlying assets. Then, we show that ETFs increase the volatility of the underlying assets, and that the prices of the underlying assets are affected by shocks to ETFs. Finally, we present findings consistent with the idea that ETFs served as a conduit for shock propagation between the futures market and the equity market during the Flash Crash on May 6, 2010. Overall, our results suggest that arbitrage activity may induce contagion.

Date: 2011-12
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://fisher.osu.edu/supplements/10/10471/2011-20-ETFs.pdf
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://fisher.osu.edu/supplements/10/10471/2011-20-ETFs.pdf [301 Moved Permanently]--> https://fisher.osu.edu/supplements/10/10471/2011-20-ETFs.pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2011-20

Access Statistics for this paper

More papers in Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics Contact information at EDIRC.
Bibliographic data for series maintained by ().