Innovation and Informed Trading: Evidence from Industry ETFs

102 Pages Posted: 4 Mar 2018 Last revised: 8 Oct 2019

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: November 1, 2018

Abstract

We empirically examine the impact of industry exchange traded funds (IETF) on informed trading and market efficiency. We find short interest in the IETF positively predicts the IETF return and the earnings performance of its member stocks. We also find IETF short interest spikes with hedge fund holdings on the member stock before positive earnings surprises, reflecting the “long-the-stock/short-the-IETF” strategy. This pattern is stronger among high industry-risk-exposure stocks. We conduct difference-in-difference analysis on the ETF-inception event and find IETFs reduce the post-earnings-announcement-drift more among high industry-risk-exposure stocks, indicating that IETFs improve market efficiency. We also demonstrate predictable return effects arising from the hedging use of industry ETFs.

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 (November 1, 2018). 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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