Jung-Chu Lin

This paper investigates whether inverse exchange-traded fund (ETF) trading can predict future negative underlying index returns. Using inverse ETF’s turnover rates and price volatilities to represent trading activities, this paper discovers that inverse ETF trading is significantly and positively related to future index returns and infers that the trading of inverse ETFs may not reflect informed pessimistic trading and cannot convey a bearish signal to the market. The trading activities in inverse ETFs do provide information about future index returns, yet what they reflect may be a lagging or less-informed bearish signal

This paper demonstrates that both Taiwan’s exchange-traded funds (ETFs) and equities exhibit an asymmetric volume-return relationship in which the ETF display a mixed, negative or positive, asymmetry and the equity exhibits primarily a positive asymmetry. The positive asymmetry in equities and its decline with the progressive elimination of the short-sale restriction on equities support the costly short-sale hypothesis, which considers a costly short-sale restriction or asymmetric transaction costs on long and short trading to be the source of the asymmetry. The part of a less positive asymmetry in ETFs also consists with what the costly short-sale hypothesis predicts. The later information models that consider asymmetrically-informed traders or the heterogeneity of traders to be the source of the asymmetry explain the negative asymmetry in ETFs and the upward trend in the magnitude of volume-return correlation with the grow of volume quintiles. An important conclusion is that not a single hypothesis can be a universal explanation for the asymmetric volume-return relationship. Which hypothesis may explain the volume-return asymmetry depends largely on whether the short-sale restriction is present