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The sidedness and informativeness of ETF trading and the market efficiency of their underlying indexes

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  • Xu, Liao
  • Yin, Xiangkang
  • Zhao, Jing

Abstract

This paper examines some well-known indexes of the U.S. equity markets and their Exchange-Traded Funds (ETFs). It demonstrates that both one-sided and two-sided ETF trading contributes to the market efficiency of their underlying indexes, whilst ETF trading without considerable sidedness does not contribute to efficiency improvement. The mechanism behind this is that private information and investor disagreement revealed in ETF markets reduces market frictions of their underlying stocks through shock propagation from ETFs to their underlying securities. We confirm this mechanism by the following evidence: (i) the effect of sided ETF trading is more profound when the ETF market shares more information; (ii) information flow to the index increases in the sidedness of ETF trading.

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  • Xu, Liao & Yin, Xiangkang & Zhao, Jing, 2019. "The sidedness and informativeness of ETF trading and the market efficiency of their underlying indexes," Pacific-Basin Finance Journal, Elsevier, vol. 58(C).
    • Handle: RePEc:eee:pacfin:v:58:y:2019:i:c:s0927538x19303051
    DOI: 10.1016/j.pacfin.2019.101217
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    Cited by:

    1. Kunal Saha & Vinodh Madhavan & G. R. Chandrashekhar, 2022. "Effect of COVID-19 on ETF and index efficiency: evidence from an entropy-based analysis," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 46(2), pages 347-359, April.
    2. Brunetti, Celso & Harris, Jeffrey H. & Mankad, Shawn, 2022. "Sidedness in the interbank market," Journal of Financial Markets, Elsevier, vol. 59(PA).
    3. Xu, Liao & Xue, Mingqi & Zhang, Xuan & Zhao, Yang, 2023. "Heterogeneously informed trading and the stock market efficiency during the COVID-19 pandemic," International Review of Financial Analysis, Elsevier, vol. 87(C).

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    More about this item

    Keywords

    Exchange traded fund; Equity index; Trading sidedness; Information asymmetry; Investor disagreement;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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