Information-based trading and information propagation: Evidence from the exchange traded fund market |
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Affiliation: | 1. Department of Accountancy and Finance, University of Otago, New Zealand;2. School of Business and Economics, Loughborough University, United Kingdom;3. Department of Economics and Finance, La Trobe Business School, La Trobe University, Australia |
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Abstract: | 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. |
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