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The Shift from Active to Passive and its Effect on Intraday Stock Dynamics

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  • De Rossi, Giuliano
  • Steliaros, Michael

Abstract

Recent empirical studies argue that passive funds tend to propagate liquidity shocks to the underlying securities, thus increasing stock volatility. We document that the growing importance of the closing auction has caused trading in ETFs, much like trading in the underlying stocks, to shift significantly towards the Close. Motivated by this result, we use intraday data to analyse the relation between passive ownership and stock price dynamics. The main conclusion is that the effect is concentrated at the end of the continuous trading session and at the Close. This is arguably due to the concentration of portfolio trades in the order flow during that phase. We find that among US stocks, a two standard deviation increase in ETF ownership would generate a 2.99% relative increase in volatility for the median stock near the Close. In contrast, we find little evidence that prices of passively held securities are more volatile at the beginning of the trading session.

Suggested Citation

  • De Rossi, Giuliano & Steliaros, Michael, 2022. "The Shift from Active to Passive and its Effect on Intraday Stock Dynamics," Journal of Banking & Finance, Elsevier, vol. 143(C).
    • Handle: RePEc:eee:jbfina:v:143:y:2022:i:c:s0378426622001911
    DOI: 10.1016/j.jbankfin.2022.106595
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    More about this item

    Keywords

    Exchange Traded Funds; Clientele effects; Market microstructure; Fund flows;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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