An ETF-based measure of stock price fragility

Abstract

Equity mutual fund flows are commonly employed to measure stock price fragility - a stock’s exposure to non-fundamental demand risk. However, this approach may be biased by confounding fundamental information, potentially underestimating risk exposure. We propose an alternative method that uses the primary market data of exchange-traded funds (ETFs). This approach overcomes many limitations of mutual fund data, incorporates the influence of a broader set of investor demand, and strongly predicts stock return volatility and return comovement. Our study highlights the significant role that the arbitrage trading activity of ETFs play in signaling non-fundamental demand shocks.