Price Discovery in Emerging Market ETFs

26 Pages Posted: 20 Oct 2020 Last revised: 4 Apr 2021

See all articles by Yigit Atilgan

Yigit Atilgan

Sabanci University

K. Ozgur Demirtas

Sabanci University Graduate School of Management

A. Doruk Gunaydin

Sabanci University

MUSTAFA OZTEKIN

affiliation not provided to SSRN

Date Written: October 6, 2020

Abstract

Over the last two decades, exchange traded funds (ETFs) have become a preferred investment vehicle to make directional market bets due to their low costs and high liquidity. Moreover, due to the arbitrage activities of authorized participants, prices of ETFs do not deviate materially from the prices of their underlying securities. As a result, ETFs may play a price discovery role such that systematic information is first reflected in these instruments and then transmitted to their underlying securities. We test this hypothesis by investigating the predictive relation between the returns of emerging market ETFs traded in the US and the returns to the emerging market equity indices that they track. In a sample that covers 18 countries, we find that ETF returns can predict one-day-ahead returns of their underlying indices. This relation is robust after controlling for the non-synchronicity between markets, serial correlation in index returns, and various determinants of aggregate returns. Moreover, the predictive relation is stronger during periods of higher volatility. We also find that an out-of-sample rolling window strategy outperforms investing in the market index several-fold in the majority of the markets.

Keywords: exchange traded funds, equity markets, price discovery, information efficiency

JEL Classification: G10, G11, G12, G14

Suggested Citation

Atilgan, Yigit and Demirtas, K. Ozgur and Gunaydin, A. Doruk and OZTEKIN, MUSTAFA, Price Discovery in Emerging Market ETFs (October 6, 2020). Available at SSRN: https://ssrn.com/abstract=3706070 or http://dx.doi.org/10.2139/ssrn.3706070

Yigit Atilgan (Contact Author)

Sabanci University ( email )

Orta Mahalle Üniversite Caddesi 27
Istanbul, Orhanli, 34956 Tuzla 34956
Turkey

K. Ozgur Demirtas

Sabanci University Graduate School of Management ( email )

Sabanci University, School of Management
Orhanli Tuzla
Orhanlı-Tuzla, Istanbul, 34956
Turkey
(+90) 216-483-9985 (Phone)
(+90) 216-483-9699 (Fax)

A. Doruk Gunaydin

Sabanci University ( email )

School of Management
Orhanli Tuzla
İstanbul, 34956
Turkey

MUSTAFA OZTEKIN

affiliation not provided to SSRN

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