Financial Innovation and Investor Behavior: Evidence from the ETF Market

37 Pages Posted: 16 Mar 2012 Last revised: 2 Jul 2020

See all articles by Wenxi Jiang

Wenxi Jiang

CUHK Business School, The Chinese University of Hong Kong

Yaqing Xiao

Capital University of Economics and Business

Hongjun Yan

DePaul University

Date Written: July 1, 2020

Abstract

Consistent with information-based theories, ``regular'' ETFs (i.e., those without embedded leverage) are more liquid than their underlyings. Consistent with speculation-based theories, levered ETFs have substantially higher intermediation costs than regular ETFs. The cost difference between regular and levered ETFs increases during the Global Financial Crisis or when markets are more volatile. In aggregate, regular ETF investors are trend chasers, although their fund flows do not predict future ETF returns. In contrast, levered-ETF investors are contrarians and appear to have a negative market timing ability, a result reminiscent of the existing evidence in markets dominated by speculators.

Keywords: Financial Innovation, Information Sensitivity, Speculation, Leverage, Investor Behavior, ETF.

JEL Classification: G11, G23

Suggested Citation

Jiang, Wenxi and Xiao, Yaqing and Yan, Hongjun, Financial Innovation and Investor Behavior: Evidence from the ETF Market (July 1, 2020). Available at SSRN: https://ssrn.com/abstract=2023142 or http://dx.doi.org/10.2139/ssrn.2023142

Wenxi Jiang

CUHK Business School, The Chinese University of Hong Kong ( email )

Room 1250, Cheng Yu Tung Building
Chinese University of Hong Kong
Shatin, NT 06520
Hong Kong

Yaqing Xiao

Capital University of Economics and Business ( email )

Beijing
China

Hongjun Yan (Contact Author)

DePaul University ( email )

1 East Jackson Blvd.
Chicago, IL 60604
United States

HOME PAGE: http://sites.google.com/site/hongjunyanhomepage/

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