Do Country ETFs Influence Foreign Stock Market Index? Evidence from India ETFs

Narend, S.; Thenmozhi, M.

doi:10.1177/0972652719831550

Cited by 5 publications

(4 citation statements)

References 29 publications

(37 reference statements)

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“…In India, studies on the impact of ETFs are almost nonexistent. Only Narend and Thenmozhi (2019) and Chandrasekaran and Acharya (2019) have attempted to empirically investigate how ETFs affect their underlying benchmarks. However, in the Indian context, there is no study that examines how ETFs impact individual equities which form part of their underlying portfolio.…”

Section: Effect Of Etfs On Return Co-movementmentioning

confidence: 99%

Do ETFs affect the return co-movement of their underlying assets? Evidence from an emerging market

Jhunjhunwala

Sethi

2022

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Purpose The objective of the present study is to examine how domestic and foreign exchange traded funds (ETFs) tracking Indian equities affect the return correlations of their underlying constituents. Further, this study investigates how these effects vary between periods of turmoil and calmness in the financial markets.Design/methodology/approach The study is based on quarterly data for stocks comprising the CNX (CRISIL NSE Indices) Nifty 50 Index from 2009Q1 to 2019Q4. The data on holdings of 45 domestic and 196 foreign ETFs in the sample stocks were obtained from Thomson Reuters’ Eikon. The paper employs a panel-regression methodology with stock and time fixed effects and robust standard errors.Findings This study documents that irrespective of the market conditions, foreign ETFs, particularly those from Asia–Pacific and European regions tend to exacerbate co-movement. Conversely, domestic ETFs lower co-movement in stable markets but during periods of turbulence a jump in return correlations is observed.Practical implications The results have important implications for ETF investors as well as market regulators because an increase in co-movement would reduce the diversification benefits of ETFs, thereby nullifying the biggest advantage that ETFs have to offer.Originality/valueThe literature on the economic impact of ETFs is highly skewed with the majority of the studies focusing on developed markets. To the best of the authors’ knowledge, this study is the first one to empirically examine the impact of ETFs on the return co-movement of an emerging market. Furthermore, the study is unique as the authors investigate how the effects of ETFs vary in turbulent and tranquil markets.

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Section: Effect Of Etfs On Return Co-movementmentioning

confidence: 99%

Do ETFs affect the return co-movement of their underlying assets? Evidence from an emerging market

Jhunjhunwala

Sethi

2022

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“…Sethi and Tripathi (2019) found that domestic ETFs are more volatile than their underlying portfolio. Narend and Thenmozhi (2019) investigated the impact of country ETFs which track Indian indices and found a bilateral impact between the returns of ETFs and indices. Chandrasekaran and Acharya (2019) showed that there are bidirectional volatility spillovers between domestic ETFs and their benchmark indices.…”

Section: Literature Reviewmentioning

confidence: 99%

Impact of foreign and domestic ETFs on the volatility and pricing-efficiency of constituents during turbulent and tranquil times: Indian evidence

Tripathi

Sethi

2022

IJOEM

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PurposeThe purpose of this study is to ascertain how foreign and domestic Exchange Traded Funds (ETFs) investing in Indian equities affect their return volatility and pricing efficiency. Further, we investigate how the difference in market timings affect the impact of ETFs on their constituents. Lastly, we examine how these effects vary during tranquil and turmoil periods in the ETF markets.Design/methodology/approachThe study is based on quarterly data for stocks comprising the CNX Nifty 50 Index from 2009Q1 to 2019Q3. The data on holdings of 45 domestic and 196 foreign ETFs in the sample stocks were obtained from Thomson Reuters' Eikon. The paper employs a panel-regression methodology with stock and time fixed effects and robust standard errors.FindingsForeign ETFs from North America and the Asia Pacific largely have an adverse impact on stocks' return volatility. In times of turmoil, stocks with higher coverage of European, North American and Domestic funds are susceptible to volatility shocks emanating from these regions. European and Asia Pacific ETFs are associated with improved price discovery while North American funds impound a mean-reverting component in stock prices. However, in turbulent markets, both positive and negative impacts of ETFs on pricing efficiency coexist.Originality/valueTo the best of the authors' knowledge, this is the first study that examines the impact of domestic as well as foreign ETFs on the equities of an emerging market. Furthermore, the study is unique as we investigate how the effects of ETFs vary in turbulent and tranquil markets. Moreover, the paper examines the role of asynchronous market timings in determining the ETF impact. The paper adds to the growing literature on the unintended consequences of index-linked products.

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“…The country has been one of the world’s most attractive investment locations in recent decades. Since 1991, the Indian economy has been accessible to foreign institutional investors (FII) (Narend & Thenmozhi, 2019). Since the turn of the century, the yearly average GDP growth has been between 6% and 7%.…”

Section: Introductionmentioning

confidence: 99%

Economic Policy Uncertainty Versus Sector Volatility: Evidence from India Using Multi-scale Wavelet Granger Causality Analysis

Ambatipudi

Kumar

2022

Journal of Emerging Market Finance

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The present study examines the relationship between Indian economic policy uncertainty (IEPU) and the different sector volatilities (SVs) of the Indian economy over the period 2006–2021. The relationship is studied using a multi-scale correlation framework, combining wavelet coherence analysis with the Granger causality test. The findings indicate a stronger relationship between the IEPU and SV for all sectors during COVID-19, primarily in the medium term. While IEPU led to SV during the global financial crisis (GFC), the SVs led to the IEPU during the COVID-19. However, the Granger causality test provides evidence that, in the long term, the SVs cause the IEPU while the IEPU leads to SV in the short term. The IT sector is crucial as its volatility leads to IEPU across all scales. These results have substantial implications for policymakers and portfolio managers. JEL Codes: G10, G17, G32

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Do Country ETFs Influence Foreign Stock Market Index? Evidence from India ETFs

Cited by 5 publications

References 29 publications

Do ETFs affect the return co-movement of their underlying assets? Evidence from an emerging market

Do ETFs affect the return co-movement of their underlying assets? Evidence from an emerging market

Impact of foreign and domestic ETFs on the volatility and pricing-efficiency of constituents during turbulent and tranquil times: Indian evidence

Economic Policy Uncertainty Versus Sector Volatility: Evidence from India Using Multi-scale Wavelet Granger Causality Analysis

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