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The market drives ETFs or ETFs the market: causality without Granger

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  • Peter Lerner

Abstract

This paper develops a deep learning-based econometric methodology to determine the causality of the financial time series. This method is applied to the imbalances in daily transactions in individual stocks, as well as the ETFs reported to SEC with a nanosecond time stamp. Based on our method, we conclude that transaction imbalances of ETFs alone are more informative than the transaction imbalances in the entire market. Characteristically, a sheer number of imbalance messages related to the individual stocks dominates the imbalance messages due to the ETF in the proportion of 8:1.

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  • Peter Lerner, 2022. "The market drives ETFs or ETFs the market: causality without Granger," Papers 2204.03760, arXiv.org.
    • Handle: RePEc:arx:papers:2204.03760
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    References listed on IDEAS

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    1. Pagano, Marco & Sánchez Serrano, Antonio & Zechner, Jozef, 2019. "Can ETFs contribute to systemic risk?," Report of the Advisory Scientific Committee 9, European Systemic Risk Board.
    2. Bartlett, Robert P. & McCrary, Justin, 2019. "How rigged are stock markets? Evidence from microsecond timestamps," Journal of Financial Markets, Elsevier, vol. 45(C), pages 37-60.
    3. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
    4. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
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