Differently Motivated ETF Trading Activities and the Volatility of the Underlying Index

59 Pages Posted: 8 Jul 2016 Last revised: 20 Aug 2018

See all articles by Liao Xu

Liao Xu

Jiangxi University of Finance and Economics

Xiangkang Yin

Deakin University; Financial Research Network (FIRN)

Jing Zhao

La Trobe University - School of Economics and Finance; Financial Research Network (FIRN)

Date Written: July 5, 2016

Abstract

This paper examines the correlations between two types of an index’s volatility and three trading motives of the underlying index’s ETFs. We find that ETF trading driven by belief dispersion is highly correlated with both the Variance in Efficient Price Innovations (VEPI) and the index’s total volatility. Privately-informed ETF trading is closely connected to the VEPI but not the total volatility, while liquidity ETF trading explains the total volatility but has little power in explaining the VEPI. Moreover, the leading ETF dominates smaller ETFs in determining both types of volatility and often has more explanatory power than control variables.

Keywords: Exchange Traded Fund, Index Return Volatility, Efficient Price, Private Information, Investor Disagreement, Information-based Trading.

JEL Classification: G12, G14

Suggested Citation

Xu, Liao and Yin, Xiangkang and Zhao, Jing, Differently Motivated ETF Trading Activities and the Volatility of the Underlying Index (July 5, 2016). FIRN Research Paper No. 2805276. Available at SSRN: https://ssrn.com/abstract=2805276 or http://dx.doi.org/10.2139/ssrn.2805276

Liao Xu

Jiangxi University of Finance and Economics ( email )

South Lushan Road
Nanchang, Jiangxi 330013
China

Xiangkang Yin (Contact Author)

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

Jing Zhao

La Trobe University - School of Economics and Finance ( email )

Dept of Economics and Finance
La Trobe University
Bundoora, VIC 3086
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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