The impact of ETF index inclusion on stock prices
Jean Paul Rabanal1, Dan Friedman2, John Duffy3, Olga Rud1
1University of Stavanger, Norway; 2UC Santa Cruz; 3UC Irvine
Discussant: Vitaly Orlov (University of St.Gallen)
We report on an experiment that shows how the demand for ETF index products affects the prices and trading volume of assets included or excluded from the ETF index. We compare an environment where the ETF index includes all assets against an environment where one asset is excluded from the index. We find that (i) traders place significant value on the ETF asset; (ii) there is evidence of a substantial index premium for included assets; and (iii) the index premium persists even when short-selling is permitted. The price increase of the ETF share and the underlying assets between treatments suggests that ETF products can distort the efficiency of markets.