The adverse selection component of exchange traded funds
AbstractThe aim of our paper is to examine whether Exchange Traded Funds (ETFs) diversify away the private information of informed traders. We apply the spread decomposition models of Glosten and Harris (1998) and Madhavan, Richardson and Roomans (1997) to a sample of ETFs and their control securities. Our results indicate that ETFs have significantly lower adverse selection costs than their control securities. This suggests that private information is diversified away for these securities. Our results therefore offer one explanation for the rapid growth in the ETF market.
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Bibliographic InfoArticle provided by Elsevier in its journal International Review of Financial Analysis.
Volume (Year): 19 (2010)
Issue (Month): 1 (January)
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Web page: http://www.elsevier.com/locate/inca/620166
Spread Adverse selection costs Exchange traded funds;
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