Financial Innovation and Investor Behavior: Evidence from the ETF Market
37 Pages Posted: 16 Mar 2012 Last revised: 2 Jul 2020
Date Written: July 1, 2020
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: Suggested Citation