WHAT DRIVES MY ISHARES PRICE? AN ANALYSIS OF THE INTRADAY FLOWS OF INFORMATION TO INTERNATIONAL EXCHANGE-TRADED FUNDS

Abstract

The existence of a partial overlap in the trading hours of the U.S. market and the European market allows me to investigate the difference in behaviour of the price of European iShares between the overlap and non-overlap trading periods. I find that European iShares are more volatile during the period when there is an overlap in the trading hours compared to when there is no such overlap, explained by public information released during each iShares underlying market’s trading session. A multivariate analysis reveals that the underlying market is the main driver of iShares returns. However, when information from the underlying market is not available, iShares tend to follow the U.S. market which can create price distortions. Price corrections seem to occur when the information from the underlying market becomes available again in the next trading day. I further find that iShares returns are positive in the non-overlap trading periods and negative in the overlap trading periods. I am unable to explain such difference in returns based either on the timing of information releases across markets, or on the differences of liquidity between the overlap and the non-overlap periods. I conjecture that behavioural biases on the part of ETF traders might be the reason for the observed anomalies. Finally, I propose a strategy intended to take advantage of the difference in returns between overlap and non-overlap periods. I show that such strategy is profitable in nominal terms. However, I show that such strategy might not be profitable after accounting for the costs involved with its implementation. This suggests that the limits to arbitrage imposed by the transaction costs may set the observed anomaly to continue to persist.