The Effect of ETFs on Intraday Volatility: Evidence from High-Frequency Data in China

Based on 1.5 billion minute-level trading data of Chinese stocks and ETFs from 2012 to 2024, this study finds that ETF ownership reduces the intraday volatility of underlying stocks. Empirical results indicate that ETF arbitrage activity does not exert a statistically significant effect on intraday volatility. Conversely, ETFs enhance pricing efficiency of stocks, facilitating faster incorporation of information into prices. Furthermore, the stabilizing effect on the market is more pronounced for narrow-based ETFs and single-market ETFs, compared to broad-based ETFs and cross-market ETFs. Greater information transparency and liquidity among listed firms enhance the stabilizing role of ETFs in the capital market. Using the 2019 reform of ETF creation and redemption rules on the Shenzhen Stock Exchange as an exogenous shock, the study further confirms that active ETF trading reduces intraday volatility.