Reconciling the ETF–Volatility Debate: The Opposing Roles of Primary and Secondary Markets? [SSRN]

Presented: 8th HEC PARIS Finance PhD Workshop, FMA Annual Meeting 2024, AFA Annual Meeting 2025 Student Poster Session, SGF conference 2025 Poster Session

Abstract: I reconcile seemingly conflicting evidence on whether ETFs amplify the volatility of securities in ETF portfolios. Using data on U.S. equity ETFs from 2011 to 2021, I find that ETF ownership (capturing primary market) is positively associated with underlying stock volatility, while ETF trading volume (capturing secondary market) is negatively associated. The opposing effects reflect a two-tier ETF market structure: primary market transactions amplify volatility through price pressure, while secondary market trading mitigates it by enhancing liquidity. The net effect is modestly positive for newer ETFs, which attract much less secondary market volume than older ETFs such as the SPY.

Index Sampling and the Cross-Section of Turnover: Evidence from Germany and the U.S. [SSRN]

joint with Erik Theissen

Abstract: Investors wishing to trade a basket of stocks (e.g. the DAX or the S&P500) can either exactly replicate the basket, or construct a replicating portfolio consisting of only a subset of the basket securities. The latter strategy has higher tracking error but lower transaction costs. We construct such replicating portfolios using algorithms exploiting return correlations, and using heuristics based on market capitalization or bid-ask spreads. In a German (DAX) and a US (S&P500) sample we find that stocks included in the optimized replicating portfolios have higher trading volume than other index constituents. These results suggest that such replicating portfolios are used in practice, and they add to our understanding of the cross-sectional determinants of trading volume.