Do ETFs increase the comovements of their underlying assets? Evidence from a switch in ETF replication technique (with Fabrice Riva)
Journal of Banking & Finance, Volume 170, January 2025, 107333.
Presented at: AFFI Summer Conference (2023), Eurofidai-ESSEC Conference (2022), FMA Annual Meeting (2022), and CFE Conference (2020).
Abstract: We investigate the impact of Exchange-Traded Funds (ETFs) on the comovements of their constituent securities using a novel identification that exploits the switch from synthetic to physical replication of a large French ETF. After the switch, constituent stocks experience greater commonality, in both returns and liquidity. For both the full sample of ETF constituents and the least liquid ETF constituents, a larger part of the variation in individual stock returns or liquidity is explained by market-wide variations. We present evidence that ETF creation and redemption is the transmission mechanism of the comovements. Moreover, we show that the comovements do not appear excessive.
ETF effects: The role of primary versus secondary market activities (with Carole Comerton-Forde)
Journal of Financial Markets, Volume 75, September 2025, 100983.
Presented at: RBA-FIRN Central Bank Workshop (2022), FMA Annual Meeting (2022), McMaster Seminar (2022), UNSW PhD Microstructure Workshop (2020), and WLU Brown Bag Seminar (2021).
Abstract: High-frequency traders (HFTs) dominate secondary market trading in exchange-traded funds (ETFs) but do not engage in ETF arbitrage. By contrast, primary market arbitrageurs enforce the law of one price, but their activities are infrequent and limited by arbitrage costs. We find that primary market activity is associated with increased volatility and illiquidity in overweighted ETF constituent stocks, while HFT activity is linked to narrower bid-ask spreads. Using a quasi-natural experiment in Japan, we show that while ETF primary market activity can temporarily disrupt market quality, the liquidity benefits of secondary market trading ultimately outweigh these negative effects.
Corporate Bond ETFs, Bond Liquidity, and ETF Trading Volume (Job market paper)
Presented at: AFA Annual Meeting (2022), FMA Annual Meeting (2020), Microstructure Exchange (2020).
Abstract: This paper examines the impact of corporate bond ETFs on the liquidity of their underlying bonds. To overcome identification challenges—including ETF self-selection and index effects—I combine panel regressions in levels and changes with subsample analyses across rating and liquidity segments, as well as periods of market stress. I complement these with a novel quasi-natural experiment based on an ETF index switch. The findings consistently show that ETF ownership enhances bond liquidity. ETF trading volume emerges as the central transmission mechanism, operating through interrelated channels—risk reallocation, information incorporation, and arbitrage—that strengthen corporate bond market liquidity.
RFQ Dominance and Lit Trading in European ETFs: Peaceful Coexistence? (with Jérôme Dugast and Fabrice Riva)
To be presented at: EUROFIDAI-ESSEC Paris December Finance Meeting. Presented at: Plato MI3 Conference - July 1 (2025)
Abstract: We study Request-for-Quote (RFQ) trading in European ETF markets, where RFQs account for the majority of volume. Using granular trade-level data, we compare RFQs to lit executions through a spread decomposition framework. Price impact is consistently lower for RFQ trades, a result that holds under entropy balancing and matched-sample analyses. While price impact for lit trades increases with trade imbalance, RFQ executions are less sensitive to prevailing order flow. We also document a strong association between RFQ activity and ETF primary market flows. RFQs are widely used for institutional-sized execution with limited market impact and information leakage.
ETFs: Guilty?
Presented at: FMA Annual Meeting (2025), IFMA Annual Meeting (2025).
Abstract: Using U.S. ETF holdings data, I measure ETF crowdedness as the ratio of ETF holdings to daily trading volume. In 2022, stocks in the top quintile of ETF crowdedness held ETF positions representing an average of 24 days of daily trading volume, compared to just 0.85 days in the bottom quintile. I exploit the sharp rise and cross-sectional heterogeneity in ETF crowdedness using a novel empirical design and multiple complementary strategies. As ETF crowdedness increases, stocks exhibit lower volatility, higher liquidity, and greater price efficiency. ETF short selling, proxied by fails-to-deliver, emerges as a key transmission mechanism.
Market Depth and Execution Delays (co-authored with Jérôme Dugast and Fabrice Riva)