Liquidity, style investing and excess comovement of exchange-traded fund returns

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Abstract

This study shows that exchange-traded fund (ETF) misvaluation - based on return differentials between ETFs and their net asset values (NAV) - comove excessively across ETFs. Excess comovements are positive (negative) and significant across ETFs in similar (distant) investment styles. Further tests based on return reversals suggest that misvaluation stems primarily from the ETF, rather than the NAV price. Excess comovements are greater for funds with high commonality in demand shocks and attractive liquidity characteristics. These findings are consistent with the idea that the high liquidity of ETFs attracts a clientele of short-horizon noise traders with correlated demand for investment styles.

Original languageEnglish (US)
JournalJournal of Financial Markets
DOIs
StateAccepted/In press - Oct 21 2014

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Keywords

  • Correlated demand
  • ETF
  • Excess comovement
  • Liquidity clientele
  • Style investing

ASJC Scopus subject areas

  • Economics and Econometrics
  • Finance

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