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Journal of Economics and Finance

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07-01-2022

Effect of COVID-19 on ETF and index efficiency: evidence from an entropy-based analysis

Authors: Kunal Saha, Vinodh Madhavan, G. R. Chandrashekhar

Published in: Journal of Economics and Finance | Issue 2/2022

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Abstract

We examine the informational efficiency of domestic equity ETFs vis-a-vis their underlying market indices during the COVID-19 pandemic. To do so, we employ a multiscale entropy-based methodology. Our findings indicate that the informational efficiency of all ETFs as well as the indices fall sharply during the COVID induced market crash in February-March 2020. Having said so, we find disproportionate deterioration in market efficiency of ETFs and indices pertaining to USA and Canada as compared to those of China, Hong Kong and Taiwan. Interestingly, ETFs and indices pertaining to certain developed markets were found to be less efficient than their emerging market counterparts even during the pre-covid timeline. Lastly, there is a discernible difference between the efficiency of ETFs vis-a-vis their underlying indices. These findings should nudge investors to exercise caution while dealing with ETFs, for domestic ETFs do not exactly mimic the dynamics of their underlying indices.

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We thank the anonymous reviewer for highlighting this aspect.

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Title: Effect of COVID-19 on ETF and index efficiency: evidence from an entropy-based analysis
Authors: Kunal Saha
Vinodh Madhavan
G. R. Chandrashekhar
Publication date: 07-01-2022
Publisher: Springer US
Published in: Journal of Economics and Finance / Issue 2/2022
Print ISSN: 1055-0925
Electronic ISSN: 1938-9744
DOI: https://doi.org/10.1007/s12197-021-09566-4

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