The Efficiency of International Information Flow: Evidence from the ETF and CEF Prices
31 Pages Posted: 16 Nov 2007
Date Written: November 13, 2007
While similar in their trading and organization, closed-end funds (CEFs) and exchange-traded funds (ETFs) differ in their liquidity and ease of arbitrage. We compare their price transmission dynamics using a sample of funds that invest in foreign securities and are most likely to show the deficiencies in the manner in which they process information. Our analysis shows that ETF returns are more closely related to their portfolio returns than CEF returns. However, both fund types underreact to portfolio returns but overreact to domestic stock market returns. A simple trading strategy using these results is profitable with roundtrip trading costs less than 1.38% for CEFs and 0.71% for ETFs.
Keywords: Exchange-Traded Funds, Closed-End Country Funds, Market Efficiency, International Market Integration
JEL Classification: G15, G11, G14
Suggested Citation: Suggested Citation