Does ETF trading affect the efficiency of the underlying index? |
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| Institution: | 1. International Institute for Financial Studies, Jiangxi University of Finance and Economics, China;2. Department of Finance, La Trobe Business School, La Trobe University, Bundoora, Victoria 3086, Australia;1. University of Orléans, Laboratoire d’Economie d’Orléans, Rue de Blois, 45067 Orléans, France;2. HEC Paris, 1 Avenue de la libération, Jouy en Josas, France;3. Canadian Imperial Bank of Commerce, 161 Bay Street, Toronto, Canada;1. School of Economics, Zhejiang University, China;2. School of Economics and Academy of Financial Research, Zhejiang University, China |
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| Abstract: | This study finds that both contemporaneous and lagged ETF trading volumes in both absolute and relative terms are significant contributors to the price efficiency of the underlying index. The variation in ETF shares outstanding is also positively associated with the index efficiency but it weakens the effect of ETF trading on the index efficiency. Moreover, the synthetic ETF price dominates the index in information share and the dominance increases in ETF trading. However, the relation between an individual ETF's information share and its trading volume varies, which is significantly positive for the leading ETF but ambiguous for other ETFs. |
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