The adverse selection component of exchange traded funds

Patricia L. Chelley-Steeley, Keebong Park

Research output: Contribution to journalArticle

Abstract

The aim of our paper is to examine whether Exchange Traded Funds (ETFs) diversify away the private information of informed traders. We apply the spread decomposition models of Glosten and Harris (1998) and Madhavan, Richardson and Roomans (1997) to a sample of ETFs and their control securities. Our results indicate that ETFs have significantly lower adverse selection costs than their control securities. This suggests that private information is diversified away for these securities. Our results therefore offer one explanation for the rapid growth in the ETF market.
Original languageEnglish
Pages (from-to)65-76
Number of pages12
JournalInternational Review of Financial Analysis
Volume19
Issue number1
DOIs
Publication statusPublished - Jan 2010

Keywords

  • sprea
  • adverse selection costs
  • exchange traded funds

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