Do ETF flows increase market efficiency? Evidence from China

Jilong Chen, Liao Xu and Yang Zhao

Accounting and Finance, 2020, vol. 60, issue 5, 4795-4819

Abstract: Focusing on the equity exchange traded funds (ETFs) in China, we demonstrate the significant effect of ETF flows on the informativeness of the ETF index. Following the novel approach proposed by Xu et al (2019a). to identify different driving forces for ETF flows, we explore whether the forward‐looking ETF flows at a day’s closing substantially improve the index’s efficiency on the next day. The mechanism behind it is inter‐market information spread: the efficiency effect of the forward‐looking ETF flows strengthens when ETFs share more new information; and the forward‐looking ETF flows increase the information flow to the ETF index on the next day.

Date: 2020
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