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Direct and Indirect Effects of Index ETFs on Spot‐Futures Pricing and Liquidity: Evidence from the CAC 40 Index
Author(s) -
Deville Laurent,
Gresse Carole,
de Séverac Béatrice
Publication year - 2014
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/j.1468-036x.2011.00638.x
Subject(s) - market liquidity , futures contract , index (typography) , arbitrage , spot market , futures market , economics , financial economics , index fund , spot contract , business , monetary economics , econometrics , finance , institutional investor , corporate governance , electricity , open end fund , electrical engineering , world wide web , computer science , engineering
This paper investigates how the introduction of an Exchange‐Traded Fund (ETF) directly or indirectly impacts the underlying‐index spot‐futures pricing. Using intraday data for financial instruments related to the CAC 40 index, we do not find that the spot‐futures price efficiency improvement observed after ETF introduction is explained either by the direct effect of ETF shares being used in arbitrage trades or by the indirect effect of ETF trading improving the liquidity of index stocks in the short‐run. Some of our findings suggest that the efficiency improvement could rather result from a structural change in the way index traders distribute across index markets, with the ETF market absorbing the liquidity demand from some hedgers or passive index traders.