Differently motivated exchange traded fund trading activities and the volatility of the underlying index. (14th October 2018)

• Record Type: Journal Article
• Authors: Xu, Liao; Yin, Xiangkang; Zhao, Jing
• Is Part Of: Accounting and finance. Volume 59(2019)Supplement 1
• Page Start: 859
• Page End: 886
• Publication Date: 2018-10-14
• Subjects: Exchange traded fund -- Index return volatility -- Efficient price -- Private information -- Investor disagreement -- Information‐based trading; Accounting -- Periodicals; Finance -- Periodicals; 657.05
• DOI: 10.1111/acfi.12407
• Languages: English
• ISSNs: 0810-5391

Abstract

Abstract: 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.