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Innovation and Informed Trading: Evidence from Industry ETFs

Year: 2020

Type: article

Abstract: We empirically examine the impact of industry exchange-traded funds (IETFs) on informed trading and market efficiency. We find that IETF short interest spikes simultaneously with hedge fund holdings on the member stock before positive earnings surprises, reflecting long-the-stock/short-the-ETF activity. This pattern is stronger among stocks with high industry risk exposure. A difference-in-difference analysis on the ETF inception event shows that IETFs reduce post-earnings-announcement drift more among stocks with high industry risk exposure, suggesting that IETFs improve market efficiency. We also find that the short interest ratio of IETFs positively predicts IETF returns, consistent with the hedging role of IETFs.

Source: Review of Financial Studies

DOI: 10.1093/rfs/hhaa077

Authors: Shiyang Huang, Maureen O’Hara, Zhuo Zhong

Institutions: University of Hong Kong, Cornell University, The University of Melbourne

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W2789844520

FWCI: 15.33

Cites: 40

Cited by: 134

Related to: 10