Essays in financial economics
Name
1227097475-MIT.pdf
Size
1.26 MB
Format
Adobe PDF
Checksum (MD5)
7eb46a318abce91646555087755cecb5
Author(s)
Ernst, Thomas(Thomas H.)
Advisor(s)
Haoxiang Zhu.
Date Issued
2020
Publisher
Massachusetts Institute of Technology
Abstract
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.
Description
Thesis: Ph. D., Massachusetts Institute of Technology, Sloan School of Management, September, 2020
Cataloged from student-submitted PDF version of thesis.
Includes bibliographical references.
Subjects
Sloan School of Management.
MIT Department
Sloan School of Management
Terms of Use
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.
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