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

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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)

  • Thomas Marta

Abstract

We investigate the impact of Exchange-Traded Funds (ETFs) on the comovements of their constituent securities using a novel identification which 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.

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  • Fabrice Riva & Thomas Marta, 2022. "Do ETFs increase the comovements of their underlying assets? Evidence from a switch in ETF replication technique," Post-Print hal-03969597, HAL.
    • Handle: RePEc:hal:journl:hal-03969597
    Note: View the original document on HAL open archive server: https://hal.science/hal-03969597
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    1. Peter B. Lerner, 2023. "A New Entropic Measure for the Causality of the Financial Time Series," JRFM, MDPI, vol. 16(7), pages 1-17, July.

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    Keywords

    ETFs; Commonality;

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