Are the flows of exchange‐traded funds informative?. Issue 4 (22nd May 2022)

• Record Type: Journal Article
• Authors: Xu, Liao; Yin, Xiangkang; Zhao, Jing
• Is Part Of: Financial management. Volume 51:Issue 4(2022)
• Page Start: 1165
• Page End: 1200
• Publication Date: 2022-05-22
• Subjects: authorized participant -- exchange‐traded fund (ETF) -- information asymmetry -- public news; Corporations -- Finance -- Periodicals; 658.1505
• DOI: 10.1111/fima.12396
• Languages: English
• ISSNs: 0046-3892

Abstract

Abstract: This paper provides novel evidence of information asymmetry in exchange‐traded fund (ETF) markets. By decomposing daily ETF flows, we find that the unexpected flow component, orthogonal to the components driven by market making and arbitraging, wields substantial power in predicting next day's ETF returns. Informed traders are able to exploit their information advantage to realize an annualized open‐to‐close return of 19.16% or close‐to‐close return of 22.42%. The informativeness of the unexpected ETF component is further confirmed by its strong power of predicting next day's macroeconomic and ETF‐related news, while the market‐making‐ and arbitraging‐driven components are not closely related to forthcoming news.