The effects of OF ETF creation on the price efficiency of underlying stocks

• Author(s): Bueno, Bruna Helena Belchior Machado da Silva
• Date: 2012
• Persistent ID: http://hdl.handle.net/10362/9580
• Origin: Repositório Institucional da UNL
• Subject(s): Exchange traded funds; Price efficiency; Adverse selection hypothesis
• Document Type: Master thesis
• Language: English
• Advisor(s): Prado, Melissa
• Contributor(s): RUN

Description

A Work Project, presented as part of the requirements for the Award of a Masters Degree in Finance from the NOVA – School of Business and Economics

In this assignment I build an intuitive panel regression model, in order to achieve a clear isolation of the impact of the inception of the first Exchange Traded Fund created on the FTSE100 index on the price efficiency of its underlying stocks. The main finding of this analysis is that price efficiency at the individual stock market decreases after ETF introduction. Thus, the adverse selection hypothesis highlights the shift of liquidity traders to the basket security, leaving informed traders exposed in the individual market. This decrease is evident and significant for different time range samples employed, as well as for the several measures of price efficiency used.