Liquidity, Style Investing, and Excess Comovement of Exchange-Traded Fund Returns
53 Pages Posted: 8 Aug 2013 Last revised: 25 May 2016
Date Written: May 11, 2016
This study shows that exchange-traded fund (ETF) misvaluation — based on return differentials between ETFs and their net asset values (NAV) — comove excessively across ETFs. Excess comovements are positive (negative) and significant across ETFs in similar (distant) investment styles. Further tests based on return reversals suggest that misvaluation stems primarily from the ETF, rather than the NAV price. Excess comovements are greater for funds with high commonality in demand shocks and attractive liquidity characteristics. These findings are consistent with the idea that the high liquidity of ETFs attracts a clientele of short-horizon noise traders with correlated demand for investment styles.
Keywords: ETF, Excess Comovement, Correlated Demand, Liquidity clientele, Style investing, Market Efficiency
JEL Classification: G10, G12, G14, G23
Suggested Citation: Suggested Citation