A seminar by Assistant Professor Weikai Li from Singapore Management University
Title: Financial Intermediaries and Contagion in Market Efficiency: The Case of ETFs
Abstract: We propose that intermediaries’ capital constraints cause contagion in the pricing efficiency for assets managed by a common intermediary. We first use a simple model to demonstrate this idea in the context of ETFs and their lead market makers (LMMs). Next, we show comovements in ETF premia for ETFs served by the same LMM. The effects are stronger for more volatile ETFs, and for more capital-constrained LMMs. Around the debt-market disruptions of COVID-19, non-fixed-income ETFs serviced by LMMs more active in fixed income ETFs experience greater pricing differentials. Overall, the evidence indicates that intermediaries’ constraints indeed influence comovements in market efficiency.
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