Francesco Franzoni on ETFs, Arbitrage, and Contagion

Speaker:  Francesco Franzoni - Università di Lugano
  Monday, April 23, 2012 at 12:30 PM Aula E, Palazzo di Economia

Recent literature suggests that trading by institutional investors may affect the first and second moments of returns. Elaborating on this intuition, we conjecture that arbitrageurs can propagate liquidity shocks between related markets. The paper provides evidence in this direction by studying Exchange Traded Funds (ETFs), an asset class that has gained paramount importance in recent years. We report that arbitrage activity occurs between ETFs and the underlying assets. Then, we show that ETFs increase the volatility of the underlying assets, and that the prices of the underlying assets are affected by shocks to ETFs. Finally, we present findings consistent with the idea that ETFs served as a conduit for shock propagation between the futures market and the equity market during the Flash Crash on May 6, 2010. Overall, our results suggest that arbitrage activity may induce contagion.

Documents
Title Format  (Language, Size, Publication date)
paper  pdfpdf (it, 535 KB, 28/02/12)

Programme Director
Angelo Zago

Publication date
February 28, 2012

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