The Comparison of PIN(Probability of Informed Trading) between ETFs(Exchange-Traded-Funds) and Control Stocks

We investigate whether ETFs (Exchange-Traded Funds) have a lower PIN (Probability of Informed Trading) than control stocks. Subrahmanyam(1991) and Gorton and Pennacchi(1993) postulated that the basket security has lower information asymmetry than its component stocks. Since an ETF is a basket security and the PIN of the ETF represents its information asymmetry, the ETF should have lower PIN. Since it is not an easy work to find the whole component stock of our sample ETFs, we employ control stocks that are matched with ETFs. Therefore, we investigate whether ETFs have lower PIN than control stocks. The overall analysis based on the PIN measure does not suggest a conclusive evidence. In the case of the broad-market ETF sample, insignificant differences between ETFs and controls are found with using both the paired t-test and Wilcoxon signed rank sum test. On the contrary, the specific-industry ETF sample presents the evidence that specific-industry ETFs have a higher PIN than control securities. We understand that this inconsistency between theoretical implication of Subrahmanyam(1991) and our empirical findings may be due to the measurability of the Easley et al.(1996) PIN model. Duarte and Young(2007), Park and Eom(2008), and Benos and Joche(2007) too found similar results as ours.