Speed of Convergence to Market Efficiency in the ETFs Market

Managerial Finance, Vol. 39, No. 5, pp. 457-475, 2013

Posted: 30 Mar 2012 Last revised: 21 Apr 2013

See all articles by Karel Hrazdil

Karel Hrazdil

Simon Fraser University

Dennis Y. Chung

Simon Fraser University

Date Written: April 18, 2013

Abstract

We examine the informational efficiency of prices of all exchange traded funds (ETFs) that are actively traded on the NYSE Arca, based on methodology developed by Chordia et al. (2005), and compare the resulting price formation process to that of shares traded on the NYSE and NYSE Arca. Despite the significant differences in trading costs, volatility, and informational effects between ETFs and regular stocks, we document that price adjustments to new information for ETFs occur in about thirty minutes, which is comparable to price adjustments for traditional stocks traded on Arca. In multivariate setting, we further show that the speed of convergence to market efficiency of ETFs is not only significantly driven by volume, but also by the probability of informed trading. Our analysis of the speed of convergence provides a feasible measure to assess how efficiently prices of ETFs respond to new information. We are first to utilize the short-horizon return predictability from historical order flow approach to evaluate the price formation process of ETFs and to provide evidence on the determinants of its efficiency.

Keywords: ETFs, Price formation, Speed, Market efficiency, Liquidity, NYSE Arca

JEL Classification: G10, G14

Suggested Citation

Hrazdil, Karel and Chung, Dennis Y., Speed of Convergence to Market Efficiency in the ETFs Market (April 18, 2013). Managerial Finance, Vol. 39, No. 5, pp. 457-475, 2013, Available at SSRN: https://ssrn.com/abstract=2031016 or http://dx.doi.org/10.2139/ssrn.2031016

Karel Hrazdil (Contact Author)

Simon Fraser University ( email )

Faculty of Business Administration
8888 University Drive, Simon Fraser University
Burnaby, British Colombia V5A 1S6
Canada
778-782-6790 (Phone)
778-782-4920 (Fax)

HOME PAGE: http://www.sfubusiness.ca

Dennis Y. Chung

Simon Fraser University ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
834
PlumX Metrics