Modeling the Added Volatility Components of ETF Structure onto their Constituent Assets via the Creation/Redemption Process

Abstract

This thesis paper investigates the impact of ETF size and structure on their constituent assets’ volatility and returns. A model was built around the arbitrage mechanism of authorized participants and used data from various sources such as WRDS and Morningstar. The results show an average volatility increase of between 20-30 % for the average constituent asset and the high levels of correlation within the ETF market. The findings give important insights into our markets today.