Does ETF Ownership Increase Stock Volatility?

Abstract

Exchange Traded Funds (ETFs) are supposed to be priced equal to the net asset value of their underlying stocks, if not, opportunities of arbitrage occur and are quickly corrected by arbitrageurs. When a demand or liquidity shock hits the ETF market, the price of the underlying stocks are affected due to arbitrage trading. This thesis explores the relationship between ETF ownership and the underlying stock volatility. We have conducted a similar research as Ben-David, Franzoni and Moussawi (2017a) but for the western European market, where we in addition investigate the importance of company size and the effect of crises. The results from the European ETF market show a negative relationship between ETF ownership and stock volatility, which contradicts precedent U.S. research. This relationship is also stronger for big companies, and in periods out of crisis.