Are Authorized Participants of Exchange-Traded Funds Informed Traders?

61 Pages Posted: 30 Jul 2018 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

Date Written: July 28, 2018

Abstract

This paper provides novel evidence of information asymmetry in Exchange-Traded Fund (ETF) markets, focusing on the informational role of Authorized Participants (APs) of ETFs. By decomposing daily ETF flows, we find that APs create and redeem ETF shares in anticipation of forthcoming news events. However, ETF flows driven by market making and arbitraging are not closely related to forthcoming news. Moreover, the information-driven ETF flows have substantial power of predicting the ETF returns of the next day. APs are able to exploit their informational advantage for profits, realizing annualized open-to-close return of 19.3% or close-to-close return of 22.9%.

Keywords: Authorized Participant, Exchange-Traded Fund (ETF), Information Asymmetry, Macro News

JEL Classification: G12, G14

Suggested Citation

Xu, Liao and Yin, Xiangkang and Zhao, Jing, Are Authorized Participants of Exchange-Traded Funds Informed Traders? (July 28, 2018). Available at SSRN: https://ssrn.com/abstract=3221852 or http://dx.doi.org/10.2139/ssrn.3221852

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 ( email )

Department of Economics and Finance
Victoria 3552, 3086
Australia

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