Direct and Indirect Effects of Index ETFs on Spot-Futures Pricing and Liquidity: Evidence from the CAC 40 Index

This paper investigates how the introduction of an index security directly or indirectly impacts the underlying-index spot-futures pricing.

Author(s):

Laurent Deville

CNRS, GREDEGEDHEC Business School

Carole Gresse

Université Paris-Dauphine

Beatrice de Severac

Université Paris Ouest Nanterre La Défense

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.

Type: Working paper
Date: le 04/07/2011
Research Cluster : Finance

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