When flows matter for asset prices: Evidence from adoption of ETF creation in Israel

Thumbnail

Event details

Date and time 25.06.2021 10:3012:00  
Place and room
Zoom
Speaker Rebecca DE SIMONE, LBS
Category Conferences - Seminars

We study a 2012 reform in Israel where all exchange-traded products listed on the Tel Aviv Stock Exchange (TASE) adopted the Exchange Traded Fund (ETF) creation mechanism wherein designated market makers arbitrage between the index price and the net asset value of its benchmark. The reform greatly decreased the cost of this arbitrage activity and improved the liquidity of the ETN. We document that in response there was a significant increase in demand for ETN. Next, we find that the effect was stronger for illiquid indices containing smaller stocks. We utilize this heterogeneity to estimate the causal effect of inflows into the ETN on the price of the benchmark securities.  A 1 p.p. increase in ETN ownership as a percent of market capitalization leads to an 11.7% increase in the price of stocks, revealing highly inelastic demand for equities. Our findings provide new evidence on how passive inflows can change the distribution of capital across indices, and in turn impact price and real efficiency.