Does ETF Trading Affect the Efficiency of the Underlying Index?

69 Pages Posted: 17 Aug 2015 Last revised: 28 Jul 2016

See all articles by Liao Xu

Liao Xu

Jiangxi University of Finance and Economics

Xiangkang Yin

Deakin University; Financial Research Network (FIRN)

Date Written: March 1, 2016

Abstract

This study finds that both contemporaneous and lagged ETF trading volumes in both absolute and relative terms are significant contributors to the price efficiency of the underlying index. The creation/redemption of ETF shares is also positively associated with the index efficiency but it weakens the effect of ETF trading on the index efficiency. Moreover, the synthetic ETF price dominates the index in information share and the dominance increases in ETF trading. However, the relation between an individual ETF’s information share and its trading volume varies, which is significantly positive for the dominant ETF but ambiguous for other ETFs.

Keywords: Exchange Traded Fund, Financial Market Index, Price Efficiency, Information Share, Price Discovery

JEL Classification: G12, G14

Suggested Citation

Xu, Liao and Yin, Xiangkang, Does ETF Trading Affect the Efficiency of the Underlying Index? (March 1, 2016). 28th Australasian Finance and Banking Conference. Available at SSRN: https://ssrn.com/abstract=2645273 or http://dx.doi.org/10.2139/ssrn.2645273

Liao Xu (Contact Author)

Jiangxi University of Finance and Economics ( email )

South Lushan Road
Nanchang, Jiangxi 330013
China

Xiangkang Yin

Deakin University ( email )

Melbourne, Victoria
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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