Are the Flows of Exchange-Traded Funds Informative?

57 Pages Posted: 30 Jul 2018 Last revised: 25 Jan 2021

See all articles by Liao Xu

Liao Xu

Zhejiang Gongshang University (ZJGSU)

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. By decomposing daily ETF flows, we find that the unexpected flow component, orthogonal to the components driven by market-making and arbitraging, wields substantial power in predicting next day’s ETF returns. Informed traders are able to exploit their information advantage to realize an annualized open-to-close return of 19.16% or close-to-close return of 22.42%. The informativeness of the unexpected ETF component is further confirmed by its strong power of predicting next day’s macro news while the demand- and arbitrage-driven components are not closely related to forthcoming news.

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 the Flows of Exchange-Traded Funds Informative? (July 28, 2018). Available at SSRN: https://ssrn.com/abstract=3221852 or http://dx.doi.org/10.2139/ssrn.3221852

Liao Xu

Zhejiang Gongshang University (ZJGSU) ( email )

Zhejiang
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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