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


  • The authors gratefully acknowledge the financial support of the Europlace Institute of Finance.
  • We are thankful to an anonymous referee for their high-value contribution to our paper. We also thank Claudette Babusiaux, Jonathan Dark, Bertrand Jacquillat, Terry Hendershott, Andrea Heuson, Alexander Kurov, Laurence Lescourret, Maureen O'Hara, Patrice Poncet, Christian Rabeau, and participants at the ESSEC seminar, as well as participants at the 2005 EIF meetings in Paris, the 2006 FMA European conference in Stockholm, the 2006 EFMA meetings in Madrid, and the 2006 FMA conference in Salt Lake City, for helpful comments. Correspondence: Carole Gresse.


This paper investigates how the introduction of an Exchange-Traded Fund (ETF) 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.