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2023 Jan/30
The effect of ETFs on underlying stock markets: Evidence from Korea
Research Papers 23-03
PDF
- Research Topic Capital Markets
- Page 91
- Summary
- The Korean ETF market has shown remarkable growth. ETFs, which are low-cost, diversified, and highly convenient investment products, have recorded a high average annual growth of 33% since their introduction in Korea. The growth rates surpass those of global ETF markets in terms of both market size and the number of products. On the other hand, there are concerns about ETFs such as the adverse effects of rising indexation and the impact of frequent trading and money flows of ETFs. Following the literature, this report is aimed to discuss and study the potential impact of ETFs on underlying markets.
This report analyzes the impact of ETFs on Korean stock markets. Based on recent market data on ETFs, this report concentrates on empirical analyses of information efficiency, return characteristics, and volatility.
The empirical results are summarized as follows. First, ETFs promote the reflection of fundamental information on the stock price. The larger the weight of ETF holdings, the stronger the relationship between the stock return and changes in earnings. Also, the post-earnings-announcement drift decreases as ETF ownership increases. These results are clear in the market- or industry-level systematic earnings information.
Second, ETFs cause the co-movement of stock returns in their basket portfolios. In the ETF-level analysis, The more asset held by ETFs, the stronger the synchronization of stock returns within the ETFs. In the stock-level analysis, the return co-movement between stock and market returns is strong for stocks with high ETF ownership. Furthermore, these results are conspicuous for stocks with high ETF trading activity, and both informed and uninformed trading, such as arbitrage activity, contributes to the return co-movement. Overall results imply that ETFs could have negative effects on price efficiency and investors’ diversification.
Third, an increase in stock holdings by ETFs also affects the return characteristics of individual stocks. Empirical results show that high ETF ownership is associated with negative return serial correlation and high systematic return volatility. These results are also strongly observed in stocks with high ETF trading activity similar to the prior results.
The overall results of this report show that the effects of ETFs, which have been empirically confirmed in overseas markets, are also exhibited in the Korean stock markets. The effects of ETFs on information efficiency, changes in return characteristics, and return volatility are related. Those effects could be either positive or negative on underlying stock markets.
Korean ETF markets are still small compared to the global markets. However, considering the remarkable growth of ETFs, the impacts of ETFs examined in this study would be shown constantly and in new aspects. Multifaceted research is needed on the effect of ETFs on capital markets and ways to minimize it.
The Korean ETF market has shown remarkable growth. ETFs, which are low-cost, diversified, and highly convenient investment products, have recorded a high average annual growth of 33% since their introduction in Korea. The growth rates surpass those of global ETF markets in terms of both market size and the number of products. On the other hand, there are concerns about ETFs such as the adverse effects of rising indexation and the impact of frequent trading and money flows of ETFs. Following the literature, this report is aimed to discuss and study the potential impact of ETFs on underlying markets.
This report analyzes the impact of ETFs on Korean stock markets. Based on recent market data on ETFs, this report concentrates on empirical analyses of information efficiency, return characteristics, and volatility.
The empirical results are summarized as follows. First, ETFs promote the reflection of fundamental information on the stock price. The larger the weight of ETF holdings, the stronger the relationship between the stock return and changes in earnings. Also, the post-earnings-announcement drift decreases as ETF ownership increases. These results are clear in the market- or industry-level systematic earnings information.
Second, ETFs cause the co-movement of stock returns in their basket portfolios. In the ETF-level analysis, The more asset held by ETFs, the stronger the synchronization of stock returns within the ETFs. In the stock-level analysis, the return co-movement between stock and market returns is strong for stocks with high ETF ownership. Furthermore, these results are conspicuous for stocks with high ETF trading activity, and both informed and uninformed trading, such as arbitrage activity, contributes to the return co-movement. Overall results imply that ETFs could have negative effects on price efficiency and investors’ diversification.
Third, an increase in stock holdings by ETFs also affects the return characteristics of individual stocks. Empirical results show that high ETF ownership is associated with negative return serial correlation and high systematic return volatility. These results are also strongly observed in stocks with high ETF trading activity similar to the prior results.
The overall results of this report show that the effects of ETFs, which have been empirically confirmed in overseas markets, are also exhibited in the Korean stock markets. The effects of ETFs on information efficiency, changes in return characteristics, and return volatility are related. Those effects could be either positive or negative on underlying stock markets.
Korean ETF markets are still small compared to the global markets. However, considering the remarkable growth of ETFs, the impacts of ETFs examined in this study would be shown constantly and in new aspects. Multifaceted research is needed on the effect of ETFs on capital markets and ways to minimize it.
This report analyzes the impact of ETFs on Korean stock markets. Based on recent market data on ETFs, this report concentrates on empirical analyses of information efficiency, return characteristics, and volatility.
The empirical results are summarized as follows. First, ETFs promote the reflection of fundamental information on the stock price. The larger the weight of ETF holdings, the stronger the relationship between the stock return and changes in earnings. Also, the post-earnings-announcement drift decreases as ETF ownership increases. These results are clear in the market- or industry-level systematic earnings information.
Second, ETFs cause the co-movement of stock returns in their basket portfolios. In the ETF-level analysis, The more asset held by ETFs, the stronger the synchronization of stock returns within the ETFs. In the stock-level analysis, the return co-movement between stock and market returns is strong for stocks with high ETF ownership. Furthermore, these results are conspicuous for stocks with high ETF trading activity, and both informed and uninformed trading, such as arbitrage activity, contributes to the return co-movement. Overall results imply that ETFs could have negative effects on price efficiency and investors’ diversification.
Third, an increase in stock holdings by ETFs also affects the return characteristics of individual stocks. Empirical results show that high ETF ownership is associated with negative return serial correlation and high systematic return volatility. These results are also strongly observed in stocks with high ETF trading activity similar to the prior results.
The overall results of this report show that the effects of ETFs, which have been empirically confirmed in overseas markets, are also exhibited in the Korean stock markets. The effects of ETFs on information efficiency, changes in return characteristics, and return volatility are related. Those effects could be either positive or negative on underlying stock markets.
Korean ETF markets are still small compared to the global markets. However, considering the remarkable growth of ETFs, the impacts of ETFs examined in this study would be shown constantly and in new aspects. Multifaceted research is needed on the effect of ETFs on capital markets and ways to minimize it.