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Differently motivated exchange traded fund trading activities and the volatility of the underlying index
Author(s) -
Xu Liao,
Yin Xiangkang,
Zhao Jing
Publication year - 2019
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/acfi.12407
Subject(s) - volatility (finance) , volatility swap , explanatory power , market liquidity , economics , index (typography) , econometrics , financial economics , variance swap , implied volatility , index fund , volatility smile , monetary economics , business , institutional investor , finance , computer science , corporate governance , philosophy , open end fund , epistemology , world wide web
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.