ETFs Tracking the S&P 500: Short-Term Demand and Comovement

Laura Nguyen & Lars Lehre Løvberg

Student thesis: Master thesis

Abstract

ETFs are an increasingly attractive vehicle for index investing, and part of ETF demand includes that from short-term investors. Using relative trading volume and relative liquidity, we study whether these proxies for ETF short-term demand increase the correlations of the underlying stocks. We test our hypotheses on the S&P 500 and find that increases in ETF trading activity and higher ETF relative liquidity is related to increasing constituent stock correlations. Further, we find the increase in correlations and ETF trading activity is also associated with return reversals, providing evidence that ETF trading activity imparts noise into underlying stock returns.

EducationsMSc in Advanced Economics and Finance, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2018
Number of pages120
SupervisorsMarcel Fischer