Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/232548
Authors: 
Agarwal, Vikas
Hanouna, Paul
Moussawi, Rabih
Stahel, Christof W.
Year of Publication: 
2021
Series/Report no.: 
CFR Working Paper No. 21-04
Abstract: 
We examine the impact of ETF ownership on the commonality in liquidity of underlying stocks, while controlling for other institutional ownership. Analyses using aggregate stock-level ETF ownership and common ETF ownership at the stock-pair level indicate that ETF ownership significantly increases commonality. We show that greater arbitrage activities are associated with a larger effect of ETF ownership on commonality. We use quasi-natural experiments that exploit the reconstitution of Russell indexes, and ETF trading halts, to establish the causal effect of ETF ownership and the arbitrage mechanism, respectively. Our results suggest that ETFs reduce investors' ability to diversify liquidity risk.
Subjects: 
Exchange-Traded Funds (ETFs)
Liquidity
Commonality
Arbitrage
Trading Halts
Index Reconstitution
JEL: 
G10
G12
G14
G23
Document Type: 
Working Paper

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