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The Impact of ETFs on Asset Markets: Experimental Evidence

Author

Listed:
  • John Duffy

    (University of California, Irvine)

  • Jean Paul Rabanal

    (Monash University)

  • Olga A. Rud

    (RMIT University)

Abstract

We examine how exchange traded funds (ETFs) affect asset pricing, volatility and trade volume in a laboratory asset market. We consider markets with zero or negative correlations in asset returns and the presence or absence of composite ETF assets. We find that when the returns on assets are negatively correlated, the presence of an ETF asset reduces mispricing and price volatility without decreasing trading volume. In the case where returns have zero correlation, the ETF asset has no impact. Thus, our findings suggest that ETFs do not harm, and may in fact improve, price discovery and liquidity in asset markets.

Suggested Citation

  • John Duffy & Jean Paul Rabanal & Olga A. Rud, 2019. "The Impact of ETFs on Asset Markets: Experimental Evidence," Working Papers 154, Peruvian Economic Association.
    • Handle: RePEc:apc:wpaper:154
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    References listed on IDEAS

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    More about this item

    Keywords

    ETF; asset pricing; volatility; volume; experimental finance;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • 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
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior

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