Differently Motivated ETF Trading Activities and the Volatility of the Underlying Index
Posted: 8 Jul 2016 Last revised: 17 Apr 2019
Date Written: July 5, 2016
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: Suggested Citation