Do exchange-traded fund activities destabilize the stock market? Evidence from the China securities index 300 stocks

Despite the ferocious rise of exchange-traded funds (ETFs), their impacts on market stability are neither well understood nor uncontroversial. While the intermarket linkages between ETFs and their underlying markets are known in the literature, whether ETF activities destabilize the stock market via these linkages is still an open question. Focusing on the China Securities Index 300 stocks and ETFs from 2006 to 2020, we examine the effect of ETF ownership on the volatility of the underlying stocks. Our findings indicate that ETF ownership is a dominant factor making the stock market more volatile and that the Granger causality between ETF ownership and stock volatility is bidirectional. It, therefore, consolidates the dark side of ETFs in destabilizing the stock market. Furthermore, considering the coronavirus disease outbreak as a recent channel yields the increased volatility effect of ETF ownership, implying that the pandemic magnifies the negative role of ETFs.