Direct and Indirect Effects of Index ETFs on Spot-Futures Pricing and Liquidity: Evidence from the CAC 40 Index

Laurent Deville, Carole Gresse () and Béatrice de Séverac
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Carole Gresse: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique
Béatrice de Séverac: CEROS - Centre d'Etudes et de Recherches sur les Organisations et la Stratégie - UPN - Université Paris Nanterre

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Abstract: This paper investigates how the introduction of an index security directly or indirectly impacts the underlying-index spot-futures pricing. Using intraday data for financial instruments related to the CAC 40 index, we do not find that the spot-futures price efficiency improvement observed after ETF introduction is explained either by the direct effect of ETF shares being used in arbitrage trades or by the indirect effect of ETF trading improving the liquidity of index stocks in the short run. Some of our findings suggest that the efficiency improvement could rather result from a structural change in the way index traders distribute across index markets, with the ETF market absorbing the liquidity demand from some hedgers or passive index traders.

Keywords: Futures; Exchange-Traded Fund; ETF; Efficiency; Arbitrage; Liquidity (search for similar items in EconPapers)
Date: 2014-03-01
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Citations: View citations in EconPapers (4)

Published in European Financial Management, 2014, 20 (2), pp.352-373. ⟨10.1111/j.1468-036X.2011.00638.x⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00641118

DOI: 10.1111/j.1468-036X.2011.00638.x

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