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NBER Working Papers and Publications
|November 2016||Exchange Traded Funds (ETFs)|
with Itzhak Ben-David, Francesco Franzoni: w22829
Over nearly a quarter of a century, ETFs have become one of the most popular passive investment vehicles among retail and professional investors due to their low transaction costs and high liquidity. By the end of 2016, the market share of ETFs topped over 10% of the total market capitalization traded on US exchanges, while representing more than 30% of the overall trading volume. ETFs revolutionized the asset management industry by taking market share from traditional investment vehicles such as mutual funds and index futures. Because ETFs rely on arbitrage activity to synchronize their prices with the prices of the underlying portfolio, trading activity at the ETF level translates to trading of the underlying securities. Researchers found that while ETFs enhance price discovery, they als...
Forthcoming at the Annual Review of Financial Economics, 2017, Volume 9
|May 2016||The Granular Nature of Large Institutional Investors|
with Itzhak Ben-David, Francesco Franzoni, John Sedunov: w22247
Large institutional investors own an increasing share of equity markets. We conjecture that a financial market in which large institutions dominate operates differently than a market populated by smaller independent investors. To support this view, we show that funds within the same family display higher correlation in flows and investment strategies. As a result, large institutions are likely to impose greater liquidity demand on the stocks they trade. Accordingly, we find that ownership and trades by large institutions lead to higher volatility and to increased return and liquidity comovement. Moreover, during times of market turmoil, stocks with higher ownership by large institutions display significantly larger price drops.
|April 2014||Do ETFs Increase Volatility?|
with Itzhak Ben-David, Francesco Franzoni: w20071
We study whether exchange traded funds (ETFs)--an asset of increasing importance--impact the volatility of their underlying stocks. Using identification strategies based on the mechanical variation in ETF ownership, we present evidence that stocks owned by ETFs exhibit significantly higher intraday and daily volatility. We estimate that an increase of one standard deviation in ETF ownership is associated with an increase of 16% in daily stock volatility. The driving channel appears to be arbitrage activity between ETFs and the underlying stocks. Consistent with this view, the effects are stronger for stocks with lower bid-ask spread and lending fees. Finally, the evidence that ETF ownership increases stock turnover suggests that ETF arbitrage adds a new layer of trading to the underlying s...