Are Authorized Participants of Exchange-Traded Funds Informed Traders?
61 Pages Posted: 30 Jul 2018 Last revised: 20 Aug 2018
Date Written: July 28, 2018
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: Suggested Citation