[Research Seminar] Finance: “Financial intermediaries and contagion in market efficiency: The case of ETFS” F. WEIKAI LI
Speaker: Frank WEIKAI LI
Lee Kong Chian School of Business, Singapore Management University
Date and Location – Thursday June 2nd 2022 from 13:30 to 15:00 in P400 (Paris campus),
in E033 (in visio) and on Zoom
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ABSTRACT
Capital constraints of financial intermediaries can a ect liquidity provision. We investigate whether these constraints spillover and consequently cause contagion in the degree of market eÿciency across assets managed by a common intermediary. Specifically, we provide evidence of strong comovement in pricing gaps between ETFs and their constituents for ETFs served by the same lead market maker (LMM). The e ects are stronger for ETFs that are more illiquid and volatile, when the underlying constituents of the ETFs are more costly to arbitrage, and for LMMs with more constrained capital. Using extreme disruptions in debt markets during COVID-19 as an experiment, we show that non-fixed income ETFs serviced by LMMs managing a larger fraction of fixed income ETFs experience greater pricing gaps. Overall, our results indicate that intermediaries’ constraints indeed influence comovements in pricing eÿciencies.
JEL classification: G12, G14, G21, G23
Keywords: ETFs, financial intermediaries, capital constraints