ETFs, Anomalies and Market Efficiency

67 Pages Posted: 4 Apr 2022 Last revised: 19 Oct 2023

See all articles by Ilias Filippou

Ilias Filippou

Washington University in St. Louis - John M. Olin Business School

Songrun He

Washington University in St. Louis - John M. Olin Business School

Sophia Zhengzi Li

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School

Date Written: October 18, 2023

Abstract

Investigating how ETF ownership impacts anomalies and market efficiency, we find that low ETF ownership stocks yield higher returns, greater Sharpe ratios, and more significant alphas versus high ETF ownership stocks. Moreover, high ETF ownership stocks exhibit more pronounced information flow, reducing mispricing and enhancing efficiency. These findings hold when we match the two groups by characteristics to have similar short-sales constraint, arbitrage costs, and information environment, and remain robust to controlling for those effects in Fama-MacBeth regressions. Using Russell index reconstitution as a natural experiment, we find causal evidence of ETF ownership attenuating anomaly profits.

Keywords: ETFs, ETF ownership, Anomalies, Market Efficiency

JEL Classification: G11, G12, G14, G23

Suggested Citation

Filippou, Ilias and He, Songrun and Li, Sophia Zhengzi and Zhou, Guofu, ETFs, Anomalies and Market Efficiency (October 18, 2023). Available at SSRN: https://ssrn.com/abstract=4056260 or http://dx.doi.org/10.2139/ssrn.4056260

Ilias Filippou

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Songrun He

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Sophia Zhengzi Li

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

100 Rockafeller Rd
Piscataway, NJ 08854
United States

HOME PAGE: http://https://sites.google.com/site/szlwebpage/

Guofu Zhou (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

Washington University
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6384 (Phone)
314-658-6359 (Fax)

HOME PAGE: http://apps.olin.wustl.edu/faculty/zhou/

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