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Exchange traded funds, size-based portfolios, and market efficiency

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  • Palani-Rajan Kadapakkam
  • Timothy Krause
  • Yiuman Tse

Abstract

We examine the informational efficiency of size-based US exchange traded funds (ETFs) and comparable Center for Research in Security Prices portfolios. ETFs are better suited for market efficiency tests since they avoid potential asynchronous trading problems, and their negligible bid-ask spreads greatly diminish noise due to the bid-ask bounce. Variance ratio analysis demonstrates that return autocorrelations have diminished significantly over the past decade. Granger causality tests reject the presence of lead-lag effects among size-based ETFs. However, volatility spills over from large firm ETFs to those of smaller firms, and these spillovers extend to ETF option implied volatilities. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Palani-Rajan Kadapakkam & Timothy Krause & Yiuman Tse, 2015. "Exchange traded funds, size-based portfolios, and market efficiency," Review of Quantitative Finance and Accounting, Springer, vol. 45(1), pages 89-110, July.
    • Handle: RePEc:kap:rqfnac:v:45:y:2015:i:1:p:89-110
    DOI: 10.1007/s11156-013-0429-x
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    4. Houdou Basse Mama & Stefan Mueller & Ulrich Pape, 2017. "What’s in the news? The ambiguity of the information content of index reconstitutions in Germany," Review of Quantitative Finance and Accounting, Springer, vol. 49(4), pages 1087-1119, November.

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    More about this item

    Keywords

    ETF; Variance ratio; Return/volatility spillovers; Market efficiency; G14;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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