New Economics Papers
on Market Microstructure
Issue of 2013‒05‒22
two papers chosen by
Thanos Verousis

  1. Liquidity in European Equity ETFs: What Really Matters? By Anna Calamia; Laurent Deville; Fabrice Riva
  2. Short Selling and Inside Information By Fernando D. Chague; Rodrigo De-Losso, Alan De Genaro, Bruno C. Giovannetti

  1. By: Anna Calamia; Laurent Deville; Fabrice Riva
    Abstract: Despite the importance ETFs have recently gained, little is known about their liquidity. The conventional view on ETF liquidity is that what really matters is not the size of the ETF or its trading volume but the liquidity of its benchmark index. We argue that while creation/redemption effectively creates a tight link between the ETF and the index liquidity, other factors are likely to affect the former. The aim of our paper is to provide empirical evidence of the determinants of the spreads in the European equity ETF markets from their inception in 2000 to the end of 2011. We find that, while the liquidity of ETFs effectively depends on the liquidity of their benchmark index, size also matters: larger and more heavily traded ETFs display tighter spreads. We also find that synthetic ETFs exhibit lower spreads than physical ETFs but that this effect becomes insignificant when competition is accounted for. Finally, market fragmentation also affects spreads but does so differently in physical and synthetic ETFs, which may be explained by the degree of fragmentation these ETFs really face.
    Keywords: ETFs, liquidity, bid-ask spread, competition, fragmentation, synthetic replication, physical replication
    JEL: G10
    Date: 2013–04
  2. By: Fernando D. Chague; Rodrigo De-Losso, Alan De Genaro, Bruno C. Giovannetti
    Abstract: Using data on all lending deals in the Brazilian stock market from 2009 to 2011, we provide answers to: i) are short-sellers informed in Brazil?, ii) which short sellers are informed?, and iii) how are short sellers informed? The answer to the first question is positive, the Brazilian short-seller is informed. Among short-sellers, individual investors are the most informed ones followed by investment funds. As to how they short-sell, we show that funds tend to short-sell on the days and the day after news releases, an indication that funds short-sell after processing news. On the other hand, individual investors increase short-selling activity in advance of bad news and decrease short-selling activity prior to good news. We take this as a strong indication of inside information trading in the short selling market.
    Keywords: Asymmetric information; Manipulation; News media; Short sales
    JEL: G12 G14 G15 G28
    Date: 2013–05–13

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