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

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  • Laurent Deville
  • Carole Gresse
  • Béatrice de Séverac

Abstract

This paper investigates how the introduction of an Exchange†Traded Fund (ETF) 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.

Suggested Citation

  • Laurent Deville & Carole Gresse & Béatrice de Séverac, 2014. "Direct and Indirect Effects of Index ETFs on Spot†Futures Pricing and Liquidity: Evidence from the CAC 40 Index," European Financial Management, European Financial Management Association, vol. 20(2), pages 352-373, March.
    • Handle: RePEc:bla:eufman:v:20:y:2014:i:2:p:352-373
    DOI: 10.1111/j.1468-036X.2011.00638.x
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    References listed on IDEAS

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    Cited by:

    1. De Winne, Rudy & Gresse, Carole & Platten, Isabelle, 2014. "Liquidity and risk sharing benefits from opening an ETF market with liquidity providers: Evidence from the CAC 40 index," International Review of Financial Analysis, Elsevier, vol. 34(C), pages 31-43.
    2. Luca J. Liebi, 2020. "The effect of ETFs on financial markets: a literature review," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 34(2), pages 165-178, June.
    3. Buckle, Mike & Chen, Jing & Guo, Qian & Tong, Chen, 2018. "Do ETFs lead the price moves? Evidence from the major US markets," International Review of Financial Analysis, Elsevier, vol. 58(C), pages 91-103.

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