The sidedness and informativeness of ETF trading and the market efficiency of their underlying indexes

摘要

This paper examines some well-known indexes of the U.S. equity markets and their Exchange-Traded Funds (ETFs). It demonstrates that both one-sided and two-sided ETF trading contributes to the market efficiency of their underlying indexes, whilst ETF trading without considerable sidedness does not contribute to efficiency improvement. The mechanism behind this is that private information and investor disagreement revealed in ETF markets reduces market frictions of their underlying stocks through shock propagation from ETFs to their underlying securities. We confirm this mechanism by the following evidence: (i) the effect of sided ETF trading is more profound when the ETF market shares more information; (ii) information flow to the index increases in the sidedness of ETF trading.