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Direct and Indirect Effects of Index ETFs on Spot-Futures Mispricing and Illiquidity

Author

Listed:
  • Laurent Deville

    (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - CNRS - Centre National de la Recherche Scientifique - UniCA - Université Côte d'Azur)

  • Carole Gressse

    (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)

Abstract

Our article investigates how the introduction of an index security directly and indirectly impacts the links between the underlying-index spot-futures mispricing. Using intraday data for financial instruments related to the CAC 40 index, we show that the efficiency improvement consequent to the inception of the Lyxor CAC 40 Exchange-Traded Fund (ETF) is not a direct effect of arbitrage trading using the ETF as the cash asset, as argued in previous literature. Indeed, ETF trading does not Grangercause futures price reversion. However, there is a strong causal relation between indexfutures mispricing and illiquidity in the underlying stocks after the introduction of the ETF, suggesting that the ETF introduction indirectly improves spot-future price linkage by enhancing the liquidity of the underlying stocks.

Suggested Citation

  • Laurent Deville & Carole Gressse & Béatrice de Séverac, 2012. "Direct and Indirect Effects of Index ETFs on Spot-Futures Mispricing and Illiquidity," Post-Print halshs-00727687, HAL.
    • Handle: RePEc:hal:journl:halshs-00727687
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