Abstract

http://ssrn.com/abstract=2023142
 


 



Financial Innovation, Investor Behavior, and Arbitrage: Implications from the ETF Market


Wenxi Jiang


Yale University - School of Management

Hongjun Yan


Driehaus College of Business, DePaul University

March 31, 2016


Abstract:     
Regular and levered ETFs are markedly different financial innovations. Regular ETFs improve liquidity: they are more liquid than their underlying stocks. In contrast, although the levered ETF market has a substantially higher turnover, it also has a significantly higher bid-ask spreads and larger price impacts. Our interpretation is that levered ETFs are appealing to short-term levered speculators. The aggregate cost levered ETF investors incur is around 10% of the market capitalization, or around $2 billion, each year. Moreover, regular ETF investors appear to be momentum traders, while levered ETF investors are contrarians: For regular (levered) ETFs, their monthly fund flows are strongly positively (negatively) correlated with past returns. Finally, arbitrage forces push ETF prices partially towards their NAVs, and this mechanism is less effective for levered ETFs than for regular ones.

Number of Pages in PDF File: 26

Keywords: Financial Innovation, Leverage, Investor behavior, Index

JEL Classification: G11, G23


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Date posted: March 16, 2012 ; Last revised: April 1, 2016

Suggested Citation

Jiang, Wenxi and Yan, Hongjun, Financial Innovation, Investor Behavior, and Arbitrage: Implications from the ETF Market (March 31, 2016). Available at SSRN: http://ssrn.com/abstract=2023142 or http://dx.doi.org/10.2139/ssrn.2023142

Contact Information

Wenxi Jiang
Yale University - School of Management ( email )
New Haven, CT 06520
United States
Hongjun Yan (Contact Author)
Driehaus College of Business, DePaul University ( email )
1 East Jackson Blvd.
Chicago, IL 60604
United States
HOME PAGE: http://sites.google.com/site/hongjunyanhomepage/
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