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ETFs’ high overnight returns: The early liquidity provider gets the worm

Marie-Eve Lachance

Journal of Financial Markets, 2021, vol. 52, issue C

Abstract: I examine the extent to which exchange-traded funds’ (ETFs) unusually high overnight returns are distorted by market microstructure effects; specifically, positive order imbalances and overnight increases in bid-ask spreads. Introducing a model that isolates these effects, I show that they artificially increase ETFs’ overnight returns by an average of over 6% annually. I find that the ETF market is prone to these distortions because its rapid growth is accompanied by order imbalances exceeding 10%. I provide detailed intraday statistics on order imbalances and spreads, and an example of an overnight investment strategy selecting ETFs susceptible to overnight biases.

Keywords: Exchange-traded funds; Overnight returns; Order imbalances; Bid-ask spreads (search for similar items in EconPapers)
JEL-codes: G14 G23 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:52:y:2021:i:c:s138641812030032x

DOI: 10.1016/j.finmar.2020.100563

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Journal of Financial Markets is currently edited by B. Lehmann, D. Seppi and A. Subrahmanyam

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