Do ETFs increase the comovements of their underlying assets? Evidence from a switch in ETF replication technique

Thomas Marta and Fabrice Riva
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Fabrice Riva: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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Abstract: We investigate the impact of Exchange-Traded Funds (ETFs) on the comovements of their constituent securities using a novel identification that exploits the switch from synthetic to physical replication of a large French ETF. After the switch, constituent stocks experience greater commonality, in both returns and liquidity. For both the full sample of ETF constituents and the least liquid ETF constituents, a larger part of the variation in individual stock returns or liquidity is explained by market-wide variations. We present evidence that ETF arbitrage is the transmission mechanism of the comovements. Moreover, we show that the comovements do not appear excessive.

Keywords: ETFs; Commonality (search for similar items in EconPapers)
Date: 2022-10
Note: View the original document on HAL open archive server: https://hal.science/hal-03969602v1
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Citations: View citations in EconPapers (1)

Published in FMA 2022 Annual Meeting, Oct 2022, Atlanta, United States

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Working Paper: Do ETFs increase the comovements of their underlying assets? Evidence from a switch in ETF replication technique (2022)
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