The impact of multilateral trading facilities on price discovery: Further evidence from the European markets

This study examines relative price discovery for three major European indices, FTSE, CAC, and DAX, their futures and exchange traded funds (ETFs) using the data on 5‐minute intraday transaction prices over a four‐year period. We computed both Hasbrouck (1995) information share with error bounds and Gonzalo and Granger's (1995) common factor weights approach. Gonzalo and Granger's (1995) common factor weights suggest the index futures contracts play a dominant role in price discovery in the CAC market: the CAC 40 index futures lead the price discovery and Lyxor CAC 40 ETFs serving the second resort for information transmission. This could be due to the less frequent trading of ETFs. More importantly, CAC40 under the Gonzalo & Granger (1995) test shows upper and lower error bounds in good range may be the main reason to drive for the meaningful results. In contrast, the upper and lower bounds estimated from the Hasbrouck (1995) are far distant for most cases. Finally, FTSE and DAX markets offer compelling evidence to show that ETFs lead price discovery and spots and futures follows.     

A Likelihood Ratio Test of Price Volatilities: Comparing Stock Index Spot and Futures

This paper uses three methods to estimate the price volatility of two stock market indexes and their corresponding futures contracts. The classic variance measure of volatility is supplemented with two newer measures, derived from the Garman-Klass and Ball-Torous estimators. A likelihood ratio test is used to compare the classic variance measure of price volatilities of two stock market indexes and their corresponding futures contracts during the bull market of the 1980s. The stock market volatilities of the Standard & Poor's 500 (S&P 500) and New York Stock Exchange (NYSE) indexes were found to be significantly lower than their respective futures price volatilities. Since information may flow faster in the futures markets than in the corresponding stock market, our results support Ross's information-volatility hypothesis. It was also noted that the NYSE spot volatility was lower than the S&P 500 spot volatility. If the rate of information flow and firm size are positively related, then the lower NYSE spot volatility is explained by the size effect. The futures price volatilities for the two indexes were insignificantly different from each other. With stock index spot-futures price correlations approaching unity, one implication of our results for index futures activity is that smaller positions in futures contracts may suffice to achieve hedging or arbitrage goals.     

Analysis of DJIA,S&P 500, S&P 400, NASDAQ 100 and Russell 2000 ETFs and their influence on price discovery

This study examines the temporal behavior of price discovery in the spot, ETF and futures markets of the DJIA, S&P 500, S&P 400, NASDAQ 100 and Russell 2000. We document an increasing trend in the price discovery metrics of exchange traded funds for all indexes but the DJIA. Contrary to past studies, our findings show that the spot market rather than the futures market leads the price discovery. The arbitrage process that links exchange traded funds to spot prices, and not the futures prices might explain the results. This daily arbitrage that ensures exchange traded funds prices equal net asset values appear to promote spot market price discovery especially with the popularity of exchange traded funds in more recent years. We additionally document that the temporal behavior of the exchange traded funds price discovery metric affects differently price discovery in the spot and futures markets across indexes.     

Intraday Price Discovery in the DJIA Index Markets

Abstract:  This paper explores the dynamics of price discovery between the Dow Jones Industrial Average (DJIA) index and its three derivative products: the DIAMOND exchange-traded fund (ETF), the floor-traded regular futures, and the electronically traded mini futures. Even though the American Stock Exchange is the primary listing exchange for the ETF, the analysis indicates that the electronically traded ETF on the Archipelago (ArcaEx) electronic communications network dominates the price discovery process for DIAMOND shares. The E-mini futures contribute the most to price discovery, followed by the ArcaEx DIAMOND. The DJIA index and regular futures contribute least to price discovery. The analysis is repeated using the derivatives of the S&P 500 index as a robustness check. The results indicate that multi-market trading ensures greater pricing efficiency. Informed traders favor electronic trading because of immediate and anonymous trade execution.     

The Influence of Information Arrival on Market Microstructure: Evidence from Three Related Markets

This study examines the influence of information arrival on market microstructure for the MMI, NYSE, and S&P 500 stock index futures markets, with special emphasis on the effects of opening and closing of trading and expiration of contracts on price movements and trading activities. The results of the examination show that although the opening of the (MMI) futures market is associated with higher volatility, it is when the spot market opens that volatility reaches its highest level. Similarly, the closing of the futures markets, though more volatile, is not as volatile as the closing of the spot markets. Trading patterns, on the other hand, are distinct from volatility. For MMI, trading declines consistently after the close of the spot market. In contrast, the NYSE and S&P 500 continue to trade and reach a peak at the close of the futures markets. Expiration effects are evidenced by the increase in volatility and trading near the closing of the MMI and the spillover to the NYSE and S&P 500. In sharp contrast, the expirations of the NYSE and S&P 500 are only assooiated with decrease in trading, suggesting that efforts to dampen volatility by changing expiration days from Friday to Thursday and shifting settlement price from Friday close to Friday open, have been successful.     

The effect of liquidity and arbitrage on the price efficiency of Chinese ETFs

We study the potential factors that determine the large and persistent price deviations in Chinese equity exchange-traded funds (ETFs). Our results suggest that ETF liquidity and arbitrage activity are positively correlated with ETF price efficiency, and the relation is more pronounced with higher institutional ownership. We also evaluate the effect of two exogenous shocks in the Chinese market. Using a policy change that added market makers to ETFs on the Shenzhen Stock Exchange (SZSE) and Shanghai Stock Exchange (SSE), we find that market makers improve price efficiency and that the impact is stronger for ETFs with lower liquidity. We also exploit a change in trading rules on the SZSE and show that the relaxation of arbitrage restrictions improves price efficiency. Altogether, these findings provide evidence that lack of liquidity, due to the unique market structure and regulations of the Chinese market, contributes to price inefficiency of Chinese ETFs.     

Information-based trading and information propagation: Evidence from the exchange traded fund market

This paper studies the information-based trading of exchange-traded funds (ETFs) and the information propagation from the ETF market to its index. We find that the ETF trading triggered by asymmetric information and belief heterogeneity not only accelerates the ETFs' price discovery process but also increases the flow of information to the tracked index. Moreover, the price efficiency of the index also improves along with these two types of trading and their efficiency effects can be further enhanced by a speedier ETFs' price discovery. These observations portray the mechanism of the inter-market information propagation.     

What Drives ETF Flows?

The value of exchange traded fund (ETF) assets has increased from $66 billion in 2000 to almost a trillion dollars in 2010. We use this massive expansion in ETF assets to study what drives ETF flows. Using a data set of over 500 ETFs from 2001 to 2010, we show that ETF investors chase returns in the same way as mutual fund investors. While there is an active debate about whether return chasing by mutual fund investors represents the pursuit of superior talent, the existence of return chasing in this passively managed environment should not represent a search for skilled managers. We also show that ETF flows increase following high volume, small spreads, and high price/net asset value ratios. Finally, we find little evidence of superior market timing in ETF flows. Our results suggest that return chasing in both mutual funds and ETFs is more likely the result of naïve extrapolation bias on the part of investors that has contributed to the growth of the ETF industry.     

Trading costs and price discovery

The price discovery roles of a set of related markets or securities have been investigated in many different settings where trading costs effect is often commingled with other trading arrangement factors. In Hong Kong, regular futures and mini futures contracts as well as their underlying spot asset are all traded on a same electronic trading platform. The trading arrangements thus provide us with a unique setting where we can isolate the impacts of transaction costs on price discovery. Using Hasbrouck’s (J Finance 50:1175–1199, 1995) information share approach, it is found that in Hong Kong, the regular futures contracts market plays a dominant role in price discovery while the mini futures and cash index markets play minor roles. The results in this paper provide an unequivocal support to the trading costs hypothesis.     

Do exchange‐traded fund flows increase the volatility of the underlying index? Evidence from the emerging market in China

Studying 70 Chinese equity exchange‐traded funds (ETFs), we show that daily ETF flows significantly increase both the total volatility and the fundamental volatility of the underlying index on the next trading day. More specifically, it is the forward‐looking flow component which captures APs’ share creation/redemption activities beyond their role of market makers that can significantly predict the two types of volatility. Moreover, ETF arbitrage (ETF's information share) enhances the effect of forward‐looking flows on the total volatility (fundamental volatility) of the index. Furthermore, the relationships between forward‐looking flows and the two types of index volatility show a two‐way contagion.     

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

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.     

Overreaction of country ETFs to US market returns: Intraday vs. daily horizons and the role of synchronized trading

In this paper we study the intraday price formation process of country Exchange Traded Funds (ETFs). We identify specific parts of the US trading day during which Net Asset Values (NAVs), currency rates, premiums and discounts, and the S&P 500 index have special effects on ETF prices, and characterize a special intraday and overnight updating structure between these variables and country ETF prices. Our findings suggest a structural difference between synchronized and non-synchronized trading hours. While during synchronized trading hours ETF prices are mostly driven by their NAV returns, during non-synchronized trading hours the S&P 500 index has a dominant effect. This effect also exceeds the one that the S&P 500 index has on the underlying foreign indices and suggests an overreaction to US market returns when foreign markets are closed.     

股指期货市场操纵与价格发现功能的关系研究

股指期货市场操纵会影响股指期货市场的价格发现功能,同样地,股指期货市场的价格发现功能也会影响股指期货市场的操纵行为。本文在理论探讨的基础上,利用股指期货主力合约及对应的沪深300指数高频数据对市场操纵行为进行实证分析。研究结果表明,当操纵嫌疑只存在于期货市场时,股指期货市场的价格发现功能将会减弱;当操纵嫌疑存在于期货、现货两个市场时,股指期货市场的价格发现功能相对会增强。而且,当股指期货市场价格发现功能较强时,市场操纵的难度和成本都将下降。当前中国股指期货市场的操纵行为可能主要局限于某些个别的、离散的交易日内,系统地通过操纵现货指数来操纵期货市场的可能性较低。     

Exchange‐Traded Fund Introductions and Closed‐End Fund Discounts and Volume

Exchange‐traded funds (ETFs), like closed‐end funds (CEFs), are managed portfolios traded like individual stocks. We hypothesize that the introduction of an ETF in an asset class similar to an existing CEF results in a substitution effect that reduces the value of the CEF's shares relative to that of its underlying assets. Our event studies show that upon the introduction of a similar ETF, CEF discounts widen significantly and relative volume declines significantly. Single‐equation and systems estimation models show that the widening in discounts and reduction in volume are related to returns‐based measures of the substitutability of ETFs for CEFs.     

Price discovery in bitcoin futures

This paper studies the contribution of the newly launched future contracts to the bitcoin price discovery process. Using well-established methodologies in the literature of the evaluation of price discovery in financial markets, we find evidence that, although the volume of bitcoins traded in the decentralized spot market overwhelms that of the futures market, the latter plays a more important role in incorporating new information about the value of bitcoin. Our empirical investigation also provides evidence of strong bi-directional dependence in the intraday volatility of the spot and futures markets.     

Price discovery in carbon exchange traded fund markets

In this study, we analyze the price discovery in four carbon exchange-traded funds (ETF) markets: (i) VanEck Low Carbon Energy ETF (Vaneck), (ii) iShares MSCI ACWI Low Carbon Target ETF (iShare), (iii) SPDR MCSI ACWI Climate Paris Aligned ETF (SPDR), and (iv) Xtrackers Emerging Markets Carbon Reduction and Climate Improvers ETF (Xtrackers) using daily closing prices of the four carbon ETFs from December 6, 2018, to November 30, 2022. All four ETF prices are found to have a single unit root implying the efficiency of these ETF markets (LeRoy 1989). However, Johansen's (1991) cointegration test reveals that these four ETFs are driven by not one but three common stochastic trends. Further Analysis reveals that iShares and SPDR markets are driven by the same market force (common stochastic trend). Based on the generalized information share (GIS), we find that approximately 57.89% and 42.11% of the price discovery occurs in the iShares and SPDR markets, respectively. We further analyze the impact of the COVID-19 pandemic by dividing the whole sample into pre-COVID and COVID subsamples. In the pre-COVID period, the GIS measures for the iShares and SPDR are 88.69% and 11.31%, respectively. However, GIS measures for the iShares and SPDR are 1.04% and 98.96%, respectively, in the COVID period indicating a significant impact of COVID-19 on price discovery.     

Do pricing efficiencies in Indian equity ETF market impact its performance?

We examine the pricing efficiency of domestic exchange-traded funds (ETFs) in the Indian equity market where growth co-exists with operating inefficiencies. The ETFs, on average, outperform their fund benchmarks, but the magnitudes of the premium (discount) and tracking error are considerably higher for a synchronously traded market. Among the ETF categories based on fund benchmarks, thematic and broad market ETFs have higher tracking errors and discounts than strategy and sectoral ETFs. We find a nonsignificant negative relationship between discount and redemption units, implying that the creation/redemption process remains unaffected by the prevailing discount in the market. Despite low arbitrage constraints, market participants fail to curtail the prevailing tracking error and discount. This study highlights the operational constraints of arbitrageurs in the Indian ETF market.     

Do ETF flows increase market efficiency? Evidence from China

Focusing on the equity exchange traded funds (ETFs) in China, we demonstrate the significant effect of ETF flows on the informativeness of the ETF index. Following the novel approach proposed by Xu et al (2019a). to identify different driving forces for ETF flows, we explore whether the forward-looking ETF flows at a day’s closing substantially improve the index’s efficiency on the next day. The mechanism behind it is inter-market information spread: the efficiency effect of the forward-looking ETF flows strengthens when ETFs share more new information; and the forward-looking ETF flows increase the information flow to the ETF index on the next day.     

Short interest in exchange-traded funds

Short selling exchange-traded funds (ETFs) has become a common means of speculating or hedging in response to pessimistic expectations about a specific market or sector, as the short interest of ETFs is more than 10 times that of individual stocks, on average. We determine that sector-based ETFs have an abnormally large short interest level, whereas international ETFs have an unusually small short interest level. The level of short interest is larger for ETFs that have a higher trading volume and a lower market capitalization, regardless of the type of ETF assessed. The level of short interest is lower for ETFs representing indexes that have tradable derivatives, but higher for international ETFs representing indexes that have tradable derivatives. We also determine that the level of short interest in an ETF serves as an effective signal of bearish sentiment when considering all ETFs, but is not an effective signal when isolating any particular type of ETF.

ETF Competition and Market Quality

This paper examines competition between exchange traded funds (ETFs) that hold nearly identical portfolios of securities. We provide evidence that incumbent‐fund liquidity is negatively affected when a new ETF is added to an asset class. The degradation in liquidity is even more severe whenever both funds follow the same benchmark. We also document a decline in primary‐market activity for the incumbent ETFs after the arrival of new competitors. Furthermore, increasing the number of funds in an asset class does not put downward pressure on fund management fees. Thus, the deterioration in market quality may not be offset by decreasing costs of fund ownership.