Price Discovery or Overreaction? A Study on the Reaction of Asia Pacific Country Etfs to Us Market

In theory, large premiums or discounts of ETF are not sustainable due to the arbitrage mechanism. However, the time gap in trading hours between US and Asia Pacific stock markets makes short-term premiums or discounts possible. The price of Asia Pacific country ETFs traded in US market is not completely driven by their net asset values but affected by the information released during US trading hours. I introduce innovative models with classical approaches and machine learning to predict the return of net asset value and find that the predictive power of the information in country ETFs and S&P500 Index is influenced by the trading time of the local markets. The returns of these ETFs do not necessarily overreact to US market but reflect investors’ short-term expectations toward the performance of the underlying indices. The correction of open price of country ETF during daytime trading hours is also identified