Abstract
The main purpose of this study is to empirically investigate the relationship between ETF flows and the volatility of NAV returns in Chinese ETF markets. Our empirical findings show that there is a positive relationship between ETF flows and the volatility of NAV returns. Additional analysis using flows-interaction terms shows that ETF demand and arbitrage flows are the main drivers of the volatility of NAV returns, compared to unexpected flows. From the analysis of IRFs, demand flow shock emerges as the most influential factor in long-term volatility compared to the other two shocks. Understanding the dynamics of ETF flows and volatility of underlying assets can aid in designing regulatory frameworks that ensure market stability while promoting the advantages of ETF investments to market participants in order to reduce information asymmetry and maintain market efficiency.