Essays in financial economics

Chapter 1 constructs a theoretical model of an ETF. Conventional wisdom warns that exchange-traded funds (ETFs) harm stock price discovery, either by ``stealing'' single-stock liquidity or forcing stock prices to co-move. Contra this belief, I develop a theoretical model that investors with stock-specific information trade both single stocks and ETFs. While the ETF is payoff-redundant, asymmetric information and a position limit for informed traders combine to make the ETF non-redundant. Single-stock investors can access ETF liquidity by means of this tandem trading, and stock prices can flexibly adjust to ETF price movements. Effects are strongest when an individual stock has a large weight in the ETF and a large stock-specific informational asymmetry. I conclude that ETFs can provide single-stock price discovery. Chapter 2 empirically tests the predictions of the ETF model. Using high-resolution data on SPDR and the Sector SPDR ETFs, I exploit exchange latencies in order to show that investors place simultaneous, same-direction trades in both a stock and ETF. Consistent with my model predictions, effects are strongest when an individual stock has a large weight in the ETF and a large stock-specific informational asymmetry. Chapter 3 models how risk-averse investors trade when they are uncertain about the quality of their signal. I show that when traders are risk-averse, traders can submit demands which are non-monotone in their signal. While their expected value for the asset may rise with stronger signals, so does the risk that the signal is noise. This leads to short-term behavior which is herding-like. Unlike herding, investors maintain a positive expected value for the asset, but it is their risk aversion leads them to take smaller positions, which has a similar slowing effect on price discovery.

Name thesis:degree_name

Doctoral

Department dc:contributor.department

Sloan School of Management

Grantor dc:publisher

Massachusetts Institute of Technology

Year dc:date.issued

2020

Author dc:creator

• Ernst, Thomas(Thomas H.)

Advisor dc:contributor.advisor

• Haoxiang Zhu.

• Sloan School of Management.

Statement dc:rights

• MIT theses may be protected by copyright. Please reuse MIT thesis content according to the MIT Libraries Permissions Policy, which is available through the URL provided.

Licence dc:rights.uri

• http://dspace.mit.edu/handle/1721.1/7582

Language dc:language.iso

eng

Handle dc:identifier.uri

https://hdl.handle.net/1721.1/129363

OAI identifier oai:identifier

oai:dspace.mit.edu:1721.1/129363