Is there Asymmetric Information About Systematic Factors? Evidence from Commonality in Liquidity

This paper provides an empirical investigation of the hypothesis that there exists information asymmetry about systematic factors. Using a sample of 112 exchange traded funds (ETF) we provide evidence in support of this hypothesis. Furthermore, through the analysis of the the adverse selection component of the bid-ask spreads (lambdas) of these ETFs and all common stocks trading on the NYSE and the NASDAQ from January 1999 to December 2003, we provide strong evidence of commonality in the adverse selection component of liquidity. We use the estimated lambda of Standard and Poor’s Depository Receipts (SPDRs) as a measure of information asymmetry about the U.S. equity market and find that these are (i) positively correlated with the lambdas of other exchange traded funds (ii) related to the lambdas on individual equity securities and (iii) they can be explained by measures of uncertainty about the aggregate market.