Journal of Banking & Finance Vol. 170 2025
Do ETFs increase the comovements of their underlying assets? Evidence from a switch in ETF replication technique
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.
- DOI
- 10.1016/j.jbankfin.2024.107333
- Volume
- 170
- Pages
- 107333
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib