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

We investigate the impact of Exchange-Traded Funds (ETFs) on the comovements of their constituent securities using a novel identification that 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 creation and redemption is the transmission mechanism of the comovements. Moreover, we show that the comovements do not appear excessive.

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Publication Details

Journal
Journal of Banking & Finance
Published
2024-11-13
DOI
https://doi.org/10.1016/j.jbankfin.2024.107333
Citations
2
Primary Topic
Financial Markets and Investment Strategies
Type
article
Field-Weighted Citation Impact
1.08
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article

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

Fabrice Riva, Thomas Marta
2 citations
Journal of Banking & Finance
Financial Markets and Investment Strategies
1.08
article

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

Fabrice Riva, Thomas Marta
article en
2 citations

Abstract

We investigate the impact of Exchange-Traded Funds (ETFs) on the comovements of their constituent securities using a novel identification that 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 creation and redemption is the transmission mechanism of the comovements. Moreover, we show that the comovements do not appear excessive.

Journal of Banking & FinanceVol. 170
Centre National de la Recherche Scientifique (FR), Université Paris Dauphine-PSL (FR), Wilfrid Laurier University (CA)
Openalex Percentile: Top 20%
Financial Markets and Investment Strategies
1.08
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