Spillover and leverage effect in Smart Beta Exchange Traded Funds: Evidence from India

This study is unique in examining the spillover and leverage effect of Smart Beta Exchange Traded Funds (SB ETFs) and their underlying indices and Cap-Weighted (CW) indices. We find unidirectional return spillover from most SB ETFs to CW indices and bidirectional return spillover between SB ETFs and...

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Bibliographic Details
Published inDecision (Calcutta) Vol. 51; no. 1; pp. 105 - 122
Main Authors Vijaya, C., Thenmozhi, M.
Format Journal Article
LanguageEnglish
Published New Delhi Springer India 01.03.2024
Subjects
Business and Management
Management
Research Article
Leverage effect
Mutual funds
Volatility spillover
Exchange traded funds
G110
Smart beta
G230
G510
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Summary:This study is unique in examining the spillover and leverage effect of Smart Beta Exchange Traded Funds (SB ETFs) and their underlying indices and Cap-Weighted (CW) indices. We find unidirectional return spillover from most SB ETFs to CW indices and bidirectional return spillover between SB ETFs and SB indices using VAR/VECM model. Besides, we find that information is transmitted faster from SB ETFs to the indices than from indices to SB ETFs. Interestingly, we observe that innovations in SB ETFs explain 97% of variance in SB indices and 81% of variance in CW indices. Hasbrouck’s information share of SB ETFs is highest (88%) followed by CW indices (5.6%). ARIMA-GARCH model shows that bidirectional volatility spillover exists between SB ETFs and the indices. ARIMA-EGARCH model provides evidence of leverage effect in SB ETFs, highlighting that volatility increases more after negative shocks than after positive shocks. Our study provides evidence of greater information transmission from SB ETFs to SB indices and to CW indices.
ISSN:0304-0941
2197-1722
DOI:10.1007/s40622-024-00376-1