The impact of exchange traded funds on the long term relationship and volatility of index markets: An emprical analysis on the ISE-30 index

This study examines how the inception of IST30 Exchange Traded Funds on April 7, 2009 impacts the volatility and long term lead-lag relationship between ISE-30 spot and futures index markets in Turkey. Using detailed data from Borsa Istanbul, we form two periods before and after the introduction of IST30 ETF. First period includes 427 days before and second period includes 548 days after introduction of IST30 ETF. We used cointegration test, vector error correction model and Granger VECM tests to examine long term lead-lag relationship between spot and futures index markets before and after the inception of IST30 ETF. Consistent with our first hypothesis, we find long term lead-lag relationship and index futures lead spot index in both periods. This result is compatible with theoretical arguments of Subrahmanyam (1991) and Gorton and Pennacchi (1993). In our second hypothesis, we investigate the volatility effects of introduction of IST30 ETF on index markets in both periods using generalized autoregressive conditional heteroskedasticity model (GARCH). Our empirical results show that volatility on both index markets decreases after introduction of IST30 ETF. In our last hypothesis, we examine volatility of underlying assets of ISE-30 index in both periods. We find 13 stocks have increasing and 17 stocks have decreasing volatility levels. Overall results show us that the volatility of underlying stocks decreases. This result is compatible with the findings of Lin ve Chiang (2005).