Can ETFs mitigate stock Co-movement? An analysis of an emerging market

Abstract

This research paper aims to examine the impact of exchange-traded funds (ETFs) on stock movements in Iran, particularly during periods of stability and turbulence. The study utilizes a sample of 38 active funds listed on the Tehran Stock Exchange that invest in stocks, covering the period from 2015Q4 to 2023Q2. The GMM panel regression method is used to analyze the data. The results indicate that ETFs in Iran decrease co-movement during stable markets, but increase it during turbulent times. This may have significant implications for ETF investors and market regulators, as higher stock volatility reduces the diversification benefits that ETFs offer. Market regulators should be vigilant of elevated levels of stock co-movement during periods of turmoil, particularly in emerging economies where financial markets are more vulnerable.