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

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  • Xu, Liao
  • Xu, Lu
  • Zhao, Jing
  • Zhao, Yang

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.

Suggested Citation

  • Xu, Liao & Xu, Lu & Zhao, Jing & Zhao, Yang, 2020. "Information-based trading and information propagation: Evidence from the exchange traded fund market," International Review of Financial Analysis, Elsevier, vol. 70(C).
    • Handle: RePEc:eee:finana:v:70:y:2020:i:c:s1057521920301393
    DOI: 10.1016/j.irfa.2020.101495
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    More about this item

    Keywords

    Disagreement among investors; Exchange-traded funds; Information asymmetry; Market efficiency; Price discovery;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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