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Inattentive Price Discovery in ETFs

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  • Mariia Kosar
  • Sergei Mikhalishchev

Abstract

This paper studies the information choice of exchange-traded funds (ETF) investors, and its impact on the price efficiency of underlying stocks. First, we show that the learning of stock-specific information can occur at the ETF level. Our results suggest that ETF investors respond endogenously to changes in the fundamental value of underlying stocks, in line with the rational inattention theory. Second, we provide evidence that ETFs facilitate propagation of idiosyncratic shocks across its constituents.

Suggested Citation

  • Mariia Kosar & Sergei Mikhalishchev, 2022. "Inattentive Price Discovery in ETFs," CERGE-EI Working Papers wp735, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    • Handle: RePEc:cer:papers:wp735
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    File URL: http://www.cerge-ei.cz/pdf/wp/Wp735.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Exchange-Traded Fund; ETF; Price Efficiency; Rational Inattention; Information Acquisition; Comovement;
    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
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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