Exchange traded funds, size-based portfolios, and market efficiency

Palani Rajan Kadapakkam, Timothy Krause, Yiuman Tse

Research output: Contribution to journalArticle

7 Scopus citations

Abstract

We examine the informational efficiency of size-based US exchange traded funds (ETFs) and comparable Center for Research in Security Prices portfolios. ETFs are better suited for market efficiency tests since they avoid potential asynchronous trading problems, and their negligible bid-ask spreads greatly diminish noise due to the bid-ask bounce. Variance ratio analysis demonstrates that return autocorrelations have diminished significantly over the past decade. Granger causality tests reject the presence of lead-lag effects among size-based ETFs. However, volatility spills over from large firm ETFs to those of smaller firms, and these spillovers extend to ETF option implied volatilities.

Original languageEnglish (US)
Pages (from-to)89-110
Number of pages22
JournalReview of Quantitative Finance and Accounting
Volume45
Issue number1
DOIs
StatePublished - Jul 1 2015

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All Science Journal Classification (ASJC) codes

  • Accounting
  • Business, Management and Accounting(all)
  • Finance

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