Laurent Deville

Exchange Traded Funds: History, Trading and Research

One of the most spectacular successes in financial innovation since the advent of financial futures is probably the creation of exchange traded funds (ETFs). As index funds, they aim at replicating the performance of their benchmark indices as closely as possible. Contrary to conventional mutual funds, however, ETFs are listed on an exchange and can be traded intradaily. Issuers and exchanges set forth the diversification opportunities they provide to all types of investors at a lower cost, but also highlight their tax efficiency, transparency, and low management fees. All of these features rely on a specific “in-kind” creation and redemption principle: New shares can continuously be created by depositing a portfolio of stocks that closely approximates the holdings of the fund; similarly, investors can redeem outstanding ETF shares and receive the basket portfolio in return. Holdings are transparent since fund portfolios are disclosed at the end of the trading day. ETFs were introduced to U.S. and Canadian exchanges in the early 1990s. In the first several years, they represented a small fraction of the assets under management in index funds. However, the 132% average annual growth rate of ETF assets from 1995 through 2001 (Gastineau, 2002) illustrates the increasing importance of these instruments. The launching of Cubes in 1999 was accompanied by a spectacular growth in trading volume, making the major ETFs the most actively traded equity securities on the U.S. stock exchanges. Since then, ETF markets have continued to grow, not only in the number and variety of products, but also in terms of assets and market value. Initially, they aimed at replicating broad-based stock indices; new ETFs extended their fields to sectors, international markets, fixed-income instruments, and, lately, commodities. By the end of 2005, 453 ETFs were listed around the world, for assets worth

Direct and Indirect Effects of Index ETFs on Spot-Futures Pricing and Liquidity: Evidence from the CAC 40 Index

343 billion. In the United States, overall ETF assets totaled

Direct and Indirect Effects of Index ETFs on Spot-Futures Mispricing and Illiquidity

296.02 billion, compared to

Legitimizing an ambiguous financial innovation: The case of Exchange-Traded Funds in France

8.9 trillion in mutual funds.

Liquidity and Arbitrage in Options Markets: A Survival Analysis Approach

This paper investigates how the introduction of an index security directly or indirectly impacts the underlying-index spot-futures pricing. Using intraday data for financial instruments related to the CAC 40 index, we do not find that the spot-futures price efficiency improvement observed after ETF introduction is explained either by the direct effect of ETF shares being used in arbitrage trades or by the indirect effect of ETF trading improving the liquidity of index stocks in the short run. Some of our findings suggest that the efficiency improvement could rather result from a structural change in the way index traders distribute across index markets, with the ETF market absorbing the liquidity demand from some hedgers or passive index traders.

Liquidity in European Equity ETFs: What Really Matters?

This paper investigates how the introduction of an index security directly or indirectly impacts the underlying-index spot-futures pricing. Using intraday data for financial instruments related to the CAC 40 index, we do not find that the spot-futures price efficiency improvement observed after ETF introduction is explained either by the direct effect of ETF shares being used in arbitrage trades or by the indirect effect of ETF trading improving the liquidity of index stocks in the short run. Some of our findings suggest that the efficiency improvement could rather result from a structural change in the way index traders distribute across index markets, with the ETF market absorbing the liquidity demand from some hedgers or passive index traders.

Les réactions du marché à l'annonce de programmes de réduction des coûts: une étude exploratoire sur les entreprises du CAC 40

The capacity of financial engineers to develop new products is apparently limitless. After a very fertile period from the mid-1960s to the mid-1980s that saw development of a huge number of innovations, including the advent of index futures and options, Miller (1986) argued that this extraordinary age had finally come to an end. As shown by Tufano (2003) in his review of financial innovation, the next 30 years were about to prove him wrong. New forms of financial products appeared regularly in the form of simple or exotic derivatives, and equity-like products trading on exchanges or in OTC markets. Tufano defines financial innovation as ‘the act of creating and then popularizing new financial instruments as well as new financial technologies, institutions and markets’. It is thus not only a matter of inventing products paying new types of cash flow, the way products spread is also of importance.