Does the ETF Market Overreact in the United States?

10.6186/IJIMS.201903_30(1).0005

Ming-Chih Lee；Chien-Ming Huang；Yin-Ru Jau

Dynamic correlation ； liquidity ； financial crisis ； monetary environment

International Journal of Information and Management Sciences

30卷1期（2019 / 03 / 01）

73 - 86

英文

This paper aims to investigate the dynamic correlation of liquidities between the ETF market and the stock market in the United States. To accurately capture the characteristics of liquidity distribution and to effectively enhance the reliability of an empirical analysis, this paper adopts the DCC-GARCH Model with normal- and heavy-tailed distribution proposed by Politis [16] to examine whether there is an overreaction to market information in the ETF market. Empirical results show that the liquidities in the two markets exhibit leptokurtic and fat-tailed features and clusters of volatilities. It clearly indicates that a fat-tailed distribution for measuring the residual pattern of the two market liquidities is more suitable and more efficient than a normal distribution. In addition, the correlation coefficients of the two markets also present time-varying characteristics. In particular, a high correlation of the two markets is found in a period of financial crisis, which indicates that ETFs provide a substitute for investment allocation. Conversely, the correlation decreases when there is a financial bull market and the monetary environment is tight, which indicates that the ETF market does not effectively respond to the underlying asset. Our results also suggest that the ETF market information flow is inconsistent with the stock market.

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