Prague Economic Papers 2016, 25(1):3-18 | DOI: 10.18267/j.pep.533

Active Management and Price Efficiency of Exchange-traded Funds

Tao Chen1, Karen H. Y. Wong2, Masayuki Susai3
1 Lee Shau Kee School of Business and Administration, Open University of Hong Kong, Hong Kong (tchen@ouhk.edu.hk).
2 Lee Shau Kee School of Business and Administration, Open University of Hong Kong, Hong Kong.
3 Faculty of Economics, Nagasaki University, Nagasaki, Japan.

This paper extends the debate over the benefits of active management by investigating its impact on price efficiency using data from available ETFs traded on the US market. After accounting for various tests in terms of price efficiency, we find that active management matters to the efficiency improvement. One practical implication of this study is that more active management element might be considered by fund managers in designing and managing their ETFs so as to reflect all available information into fund prices.

Keywords: price efficiency, exchange-traded funds, active management
JEL classification: G11, G14

Published: January 1, 2016  Show citation

ACS AIP APA ASA Harvard Chicago Chicago Notes IEEE ISO690 MLA NLM Turabian Vancouver
Chen, T., Wong, K.H.Y., & Susai, M. (2016). Active Management and Price Efficiency of Exchange-traded Funds. Prague Economic Papers, 25(1), 3-18. doi: 10.18267/j.pep.533
Download citation
  • BibTeX (.bib)
  • Bookends (.ris)
  • EasyBib (.ris)
  • EndNote (.enw)
  • EndNote 8 (.xml)
  • ISI WoS (.isi)
  • Medlars (.medlars)
  • Mendeley (.ris)
  • MODS (.xml)
  • Papers (.ris)
  • RefWorks (.txt)
  • RefManager (.ris)
  • RIS (.ris)
  • MS Word (.xml)
  • Zotero (.ris)
    • Open full article

    References

    1. Admati, A. R., Pfleiderer, P. (1988). A Theory of Intraday Patterns: Volume and Price Variability. Review of Financial Studies, 1(1), 3-40. DOI: 10.1093/rfs/1.1.3. Go to original source...
    2. Agarwal, V., Jiang, W., Tang, Y., Yang, B. (2013). Uncovering Hedge Fund Skill from the Portfolio Holdings They Hide. Journal of Finance, 68(2), 739-783. DOI: 10.1111/jofi.12012. Go to original source...
    3. Bai, Z., Li, H., Liu, H., Wong, W. K. (2011). Test Statistics for Prospect and Markowitz Stochastic Dominances with Applications. Econometrics Journal, 14(2), 278-303. DOI: 10.1111/j.1368- 423X.2011.00348.x. Go to original source...
    4. Barras, L., Scaillet, O., Wermers, R. (2010). False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas. Journal of Finance, 65(1), 179-216. DOI: 10.1111/j.1540-6261.2009.01527.x. Go to original source...
    5. Bekaert, G., Harvey, C. R., Lundblad, C. (2007). Liquidity and Expected Returns: Lessons from Emerging Markets. Review of Financial Studies, 20(6), 1783-1831. DOI: 10.1093/rfs/hhm030. Go to original source...
    6. Boehmer, E., Kelley, E. K. (2009). Institutional Investors and the Informational Efficiency of Prices. Review of Financial Studies, 22(9), 3563-3594. DOI: 10.1093/rfs/hhp028. Go to original source...
    7. Boldin, M., Cici, G. (2011). The Index Fund Rationality Paradox. Journal of Banking and Finance, 34(1), 33-43. DOI: 10.1016/j.jbankfin.2009.06.018. Go to original source...
    8. Busse, J. A., Goyal, A., Wahal, S. (2010) Performance and Persistence in Institutional Investment Management. Journal of Finance, 65(2), 765-790. DOI: 10.1111/j.1540-6261.2009.01550.x. Go to original source...
    9. Chan, C., Peretti, C. De, Qiao, Z., Wong, W. K. (2012). Empirical Test of the Efficiency of UK Covered Warrant Market: Stochastic Dominance and Likelihood Ratio Test Approach. Journal of Empirical Finance, 19(1), 162-174. Go to original source...
    10. Choi, J., Laibson, D., Madrian, B. (2010). Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds. Review of Financial Studies, 23(4), 1405-1432. DOI: 10.1093/rfs/hhp097. Go to original source...
    11. Christoffersen, S. E. K., Musto, D. K. (2002). Demand Curves and the Pricing of Money Management. Review of Financial Studies, 15(5), 1499-1524. DOI: 10.1093/rfs/15.5.1499. Go to original source...
    12. Davidson, R., Duclos, J. (2000). Statistical Inference for Stochastic Dominance and for the Measurement of Poverty and Inequality. Econometrica, 68(6), 1435-1464. DOI: 10.1111/1468-0262.00167. Go to original source...
    13. Dyck, A., Lins, K. V., Pomorski, L. (2013). Does Active Management Pay? New International Evidence. Review of Financial Studies, forthcoming.
    14. Fama, E. F., French, K. R. (2010). Luck versus Skill in the Cross Section of Mutual Fund Returns. Journal of Finance, 65(5), 1915-1947. DOI: 10.1111/j.1540-6261.2010.01598.x. Go to original source...
    15. Foster, F. D., Warren, G. J. (2013). Why Might Investors Choose Active Management? Social Science Research Network. Working Paper.
    16. Gil-Bazo, J., Ruiz-Verdu, P. (2009). The Relation between Price and Performance in the Mutual Fund Industry. Journal of Finance, 64(5), 2153-2183. DOI: 10.1111/j.1540-6261.2009.01497.x. Go to original source...
    17. Glode, V. (2011). Why Mutual Funds "Underperform". Journal of Financial Economics, 99(3), 546-559. DOI: 10.1016/j.jfineco.2010.10.008. Go to original source...
    18. Griffin, J. M., Kelly, P. J., Nardari, F. (2010). Do Market Efficiency Measures Yield Correct Inferences? A Comparison of Developed and Emerging Markets. Review of Financial Studies, 23(8), 3225-3277. DOI: 10.1093/rfs/hhq044. Go to original source...
    19. Grossman, S. J., Stiglitz, J. E. (1980). On the Impossibility of Informationally Efficient Markets. American Economic Review, 70(3), 393-408.
    20. Gruber, M. (1996). Another Puzzle: The Growth in Actively Managed Mutual Funds. Journal of Finance, 51(3), 783-810. DOI: 10.1111/j.1540-6261.1996.tb02707.x. Go to original source...
    21. Hasbrouck, J. (1993). Assessing the Quality of a Security Market: A New Approach to Transaction Cost Measurement. Review of Financial Studies, 6(1), 191-212. DOI: 10.1093/rfs/6.1.191. Go to original source...
    22. Ho, S. T., Lean, H. H., Vieito, J. P., Wong, W. K. (2013). Euronext Stock Exchange Merger and Market Efficiency. Social Science Research Network. Working Paper.
    23. Hou, K., Moskowitz, T. J. (2005). Market Frictions, Price Delay, and the Cross-Section of Expected Returns. Review of Financial Studies, 18(3), 981-1020. DOI: 10.1093/rfs/hhi023. Go to original source...
    24. Jegadeesh, N. (1990). Evidence of Predictable Behavior of Security Returns. Journal of Finance, 45(3), 881-898. DOI: 10.1111/j.1540-6261.1990.tb05110.x. Go to original source...
    25. Jegadeesh, N., Titman, S. (1993). Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency. Journal of Finance, 48(1), 65-91. DOI: 10.1111/j.1540-6261.1993.tb04702.x. Go to original source...
    26. Jensen, M. (1968). The Performance of Mutual Funds in the Period 1945-1964. Journal of Finance, 23(2), 389-416. DOI: 10.1111/j.1540-6261.1968.tb00815.x. Go to original source...
    27. Kosowski, R., Timmerman, A., Wermers, R., White, H. (2006). Can Mutual Fund "Stars" Really Pick Stocks? New Evidence from a Bootstrap Analysis. Journal of Finance, 61(6), 2551-2595. DOI: 10.1111/j.1540-6261.2006.01015.x. Go to original source...
    28. Kyle, A. P. (1985). Continuous Auctions and Insider Trading. Econometrica, 53(6), 1315-1335. DOI: 10.2307/1913210. Go to original source...
    29. Lehmann, B. N. (1990). Fads, Martingales, and Market Effi ciency. Quarterly Journal of Economics, 105(1), 1-28. Go to original source...
    30. Lesmond, D. A., Ogden, J. P., Trzcinka, C. A. (1999). A New Estimate of Transaction Costs. Review of Financial Studies, 12(5), 1113-1141. DOI: 10.1093/rfs/12.5.1113. Go to original source...
    31. Madhavan, A. (2003). The Russell Reconstitution Effect. Financial Analysts Journal, 59(4), 51-64. DOI: 10.2469/faj.v59.n4.2545. Go to original source...
    32. Mech, T. (1993). Portfolio Return Autocorrelation. Journal of Financial Economics, 34(3), 307-344. DOI: 10.1016/0304-405X(93)90030-F. Go to original source...
    33. Pastor, L., Stambaugh, R. F. (2012). On the Size of the Active Management Industry. Journal of Political Economy, 120(4), 740-781. DOI: 10.1086/667987. Go to original source...
    34. Petajisto, A. (2013). Inefficiencies in the Pricing of Exchange-Traded Funds. Social Science Research Network. Working Paper.
    35. Saffi, P. A. C., Sigurdsson, K. (2014). Price Efficiency and Short Selling. Review of Financial Studies, 24(3), 821-852. DOI: 10.1093/rfs/hhq124. Go to original source...
    36. Savov, A. (2009). Free for a Fee: The Hidden Cost of Index Fund Investing. University of Chicago. Working Paper.
    37. Tobin, J. (1958). Estimation of Relationships for Limited Dependent Variables. Econometrica, 26(1), 24-36. DOI: 10.2307/1907382. Go to original source...
    38. Warren, G., Foster, F. (2013). Why Might Investors Choose Active Management? Social Science Research Network. Working Paper.
    39. Wermers, R. (2000). Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transaction Costs, and Expenses. Journal of Finance, 55(4), 1655-1695. DOI: 10.1111/0022-1082.00263. Go to original source...
    40. Wright, J. H. (2000). Alternative Variance-Ratio Tests Using Ranks and Signs. Journal of Business & Economics Statistics, 18, 1-9. DOI: 10.2307/1392131. Go to original source...

    This is an open access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License (CC BY NC ND 4.0), which permits non-comercial use, distribution, and reproduction in any medium, provided the original publication is properly cited. No use, distribution or reproduction is permitted which does not comply with these terms.


    Return to the content