ETFs, Learning, and Information in Stock Prices
60 Pages Posted: 4 May 2020 Last revised: 24 Jun 2020
Date Written: June 24, 2020
This paper studies how the introduction of ETFs can change investors' allocation of limited attention. I develop a rational-expectations model where informed agents decide how much to learn about individual stocks, or a systematic risk-factor. Introducing an ETF does not universally increase or decrease learning about systematic risk. If the volatility of the systematic risk-factor is large, risk aversion is high, or the cost of becoming informed is high, introducing the ETF leads investors to devote more attention to the systematic risk factor. Otherwise, the ETF may lead investors investors to learn more about the individual stocks. I decompose the effect of introducing the ETF into 3 channels: (1) Changes in the share of agents who decide to become informed (2) Re-allocation of attention among informed investors (3) Decreases in risk premia. I link the model's predictions to empirical evidence on increased ETF ownership of stocks leading to less informative prices and decreased learning.
Keywords: Asset Pricing, Information Choice
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