Journal of Economics and Finance

, Volume 41, Issue 1, pp 78–99 | Cite as

Index trading and portfolio risk

Article

Abstract

We use data from the Oslo Stock Exchange. Our findings indicate that trading in ETFs is correlated with the return variance on a portfolio of the underlying index constituents. We also find correlation between ETF trading and the return variance on portfolios with non-constituents. The correlation between ETF trading and the return variance on the portfolio of the underlying index constituents is higher than for the other portfolios, but we cannot claim causality. We do not find similar effects from flows to index-linked mutual funds.

Keywords

ETFs Index funds Portfolio return variance 

JEL Classifications

G11 G12 G23 

References

  1. Andrews DWK (1991) Heteroskedasticity and autocorrelation consistent covariance matrix estimation. Econometrica 59(3):817–858CrossRefGoogle Scholar
  2. Bai Q, Bond SA, Hatch B (2012) The impact of leveraged and inverse ETFs on underlying stock returns. Working Paper, Department of Finance, University of CincinnatiGoogle Scholar
  3. Barberis N, Shleifer A (2003) Style investing. J Financ Econ 68:161–199CrossRefGoogle Scholar
  4. Barberis N, Shleifer A, Wurgler J (2005) Comovement. J Financ Econ 75:283–317CrossRefGoogle Scholar
  5. Ben-David I, Franzoni F, Moussawi R (2014) Do ETFs increase volatility. Fisher College of Business Working paper seriesGoogle Scholar
  6. Che L, Norli Ø, Priestley R (2009) Performance persistence of individual investors. Working Paper, Norwegian School of ManagementGoogle Scholar
  7. Da Z, Shive S (2013) Exchange-traded funds and equity return variances. Working Paper, Mendoza College of Business, University of Notre DameGoogle Scholar
  8. Goetzmann WN, Massa M (2003) Index funds and stock market growth. J Bus 76(1):1–28CrossRefGoogle Scholar
  9. Greenwood RM, Sosner N (2007) Trading patterns and excess comovement of stock returns. Financial Analyst Journal 63(5):69–81CrossRefGoogle Scholar
  10. Haga R, Lindset S (2012) Understanding bull and bear ETFs. Eur J Finance 18(2):149–165CrossRefGoogle Scholar
  11. Kvamvold J (2014) Mutual funds’ trading causes price impacts in their benchmark portfolios. Working Paper, Department of Economics, Norwegian University of Science and TechnologyGoogle Scholar
  12. Lee CM, Shleifer A, Thaler RH (1991) Investor sentiment and the closed-end fund puzzle. J Financ 46:75–109CrossRefGoogle Scholar
  13. Morck R, Yang F (2001) The mysterious growing value of S&P 500 membership. NBER Working Paper No. 8654Google Scholar
  14. Sullivan R. N., Xiong J. X. (2012) How index trading increases market vulnerability. Financial Analyst Journal 68(2):70–84CrossRefGoogle Scholar
  15. Trainor WJ Jr (2010) Do leveraged ETFs increase volatility. Technol Invest 1:215–220CrossRefGoogle Scholar
  16. Wurgler J (2011) Challenges to business in the twenty-first century. 136 Irving Street: American Academy of Arts and SciencesGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

  1. 1.Department of EconomicsNorwegian University of Science and TechnologyTrondheimNorway

Personalised recommendations