The Influence of ETF Trading Volume on Stock Market Efficiency in the Technology Sector

Abstract

This thesis investigates the relationship between ETF trading volume and stock market efficiency within the technology sector. While exchange-traded funds (ETFs) have become increasingly influential in global markets, their impact on the informational efficiency of underlying stocks remains a subject of debate. Looking at a panel of ten technology stocks held across ten non-leveraged, passively managed tech-focused ETFs, this study examines whether higher ETF trading volume correlates with reduced market efficiency, as proxied by return synchronicity and idiosyncratic volatility. Using daily data between 2019 and 2023, the empirical analysis employs rolling window regressions to compute dynamic firm-level measures of return synchronicity and idiosyncratic volatility. Fixed-effects panel regressions are then used to test the contemporaneous and lagged effects of ETF trading activity on these efficiency metrics. The results suggest that increased ETF trading volume is associated with higher return synchronicity and greater idiosyncratic volatility, indicating potential declines in firm-level price informativeness. These findings contribute to the growing literature on the influence of ETFs in price discovery, particularly within sector-specific ETFs. The results are robust across both main efficiency measures and remain consistent after accounting for firm and time fixed effects. This study highlights the importance of considering ETF activity when assessing stock-level efficiency in the technology sector.