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Differently motivated exchange traded fund trading activities and the volatility of the underlying index

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  • Liao Xu
  • Xiangkang Yin
  • Jing Zhao

Abstract

This paper examines the correlations between two types of a market index's volatility and three trading motives of the index's exchange traded funds (ETFs). We find that ETF trading driven by belief dispersion is highly correlated with both the variance in efficient price innovations (VEPI) and the index's total volatility. Privately informed ETF trading is closely connected to the VEPI but not the total volatility, while liquidity ETF trading explains the total volatility but has little power in explaining the VEPI. Moreover, the leading ETF dominates smaller ETFs in explaining both types of volatility and often has more explanatory power than control variables.

Suggested Citation

  • Liao Xu & Xiangkang Yin & Jing Zhao, 2019. "Differently motivated exchange traded fund trading activities and the volatility of the underlying index," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 59(S1), pages 859-886, April.
    • Handle: RePEc:bla:acctfi:v:59:y:2019:i:s1:p:859-886
    DOI: 10.1111/acfi.12407
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    Cited by:

    1. Xu, Liao & Pu, Wenyan, 2022. "ETFs, arbitrage activity, and stock market efficiency: Evidence from Chinese CSI 300 ETFs," Economic Analysis and Policy, Elsevier, vol. 73(C), pages 1-9.
    2. Chen, Jilong & Xu, Liao, 2023. "Do exchange-traded fund activities destabilize the stock market? Evidence from the China securities index 300 stocks," Economic Modelling, Elsevier, vol. 127(C).
    3. Ama Samarasinghe & Katherine Uylangco, 2022. "Stock market liquidity and traditional sources of bank business," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(3), pages 3107-3145, September.
    4. Wang, Hua & Xu, Liao & Sharma, Susan Sunila, 2021. "Does investor attention increase stock market volatility during the COVID-19 pandemic?," Pacific-Basin Finance Journal, Elsevier, vol. 69(C).

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