Innovation and Informed Trading: Evidence from Industry ETFs

87 Pages Posted: 4 Mar 2018 Last revised: 10 Aug 2020

See all articles by Shiyang Huang

Shiyang Huang

The University of Hong Kong - Faculty of Business and Economics

Maureen O'Hara

Cornell University - Samuel Curtis Johnson Graduate School of Management

Zhuo Zhong

University of Melbourne - Department of Finance

Date Written: March 5, 2020

Abstract

We empirically examine the impact of industry exchange-traded funds (IETFs) on informed trading and market efficiency. We find that IETF short interest spikes simultaneously with hedge fund holdings on the member stock before positive earnings surprises, reflecting long-the-stock/short-the-ETF activity. This pattern is stronger among stocks with high industry risk exposure. A difference-in-difference analysis on the ETF inception event shows that IETFs reduce post-earnings-announcement drift more among stocks with high industry risk exposure, suggesting that IETFs improve market efficiency. We also find that the short interest ratio of IETFs positively predicts IETF returns, consistent with the hedging role of IETFs.

Keywords: ETF, hedge funds, short interest, market efficiency, financial innovation

JEL Classification: G14, G12

Suggested Citation

Huang, Shiyang and O'Hara, Maureen and Zhong, Zhuo, Innovation and Informed Trading: Evidence from Industry ETFs (March 5, 2020). Available at SSRN: https://ssrn.com/abstract=3126970 or http://dx.doi.org/10.2139/ssrn.3126970

Shiyang Huang

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Maureen O'Hara

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States
607-255-3645 (Phone)
607-255-5993 (Fax)

Zhuo Zhong (Contact Author)

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

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