Differently Motivated Exchange Traded Fund Trading Activities and the Volatility of the Underlying Index

28 Pages Posted: 10 Apr 2019

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 - School of Economics and Finance; Financial Research Network (FIRN)

Date Written: April 2019

Abstract

This paper examines the correlations between two types of a market index's volatility and three trading motives of the index's exchange traded funds (ETFs). We find that ETF trading driven by belief dispersion is highly correlated with both the variance in efficient price innovations (VEPI) and the index's total volatility. Privately informed ETF trading is closely connected to the VEPI but not the total volatility, while liquidity ETF trading explains the total volatility but has little power in explaining the VEPI. Moreover, the leading ETF dominates smaller ETFs in explaining both types of volatility and often has more explanatory power than control variables.

Keywords: Exchange traded fund, Index return volatility, Efficient price, Private information, Investor disagreement, Information‐based trading

Suggested Citation

Xu, Liao and Yin, Xiangkang and Zhao, Jing, Differently Motivated Exchange Traded Fund Trading Activities and the Volatility of the Underlying Index (April 2019). Accounting & Finance, Vol. 59, pp. 859-886, 2019. Available at SSRN: https://ssrn.com/abstract=3369153 or http://dx.doi.org/10.1111/acfi.12407

Liao Xu (Contact Author)

Jiangxi University of Finance and Economics ( email )

South Lushan Road
Nanchang, Jiangxi 330013
China

Xiangkang Yin

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 - School of Economics and Finance ( email )

Dept of Economics and Finance
La Trobe University
Bundoora, VIC 3086
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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