This dissertation consists of three essays. The first essay studies the impact of indexing on stock price efficiency. Indexing has experienced substantial growth over the last two decades because it is an effective way of holding a diversified portfolio while minimizing trading costs and taxes. In this paper, we focus on one negative externality of indexing: the effect on efficiency of stock prices. Based on a sample of large and liquid U.S. stocks, we find that greater indexing leads to less efficient stock prices, as indicated by stronger post-earnings-announcement drift, greater deviations of stock prices from the random walk and greater return predictability from lagged order imbalances. We conjecture that reduced incentives for information acquisition and arbitrage induced by indexing are probably the main cause of the degradation in price efficiency, but we find no evidence supporting a direct impact from passive trading or any effect through liquidity. The second essay investigates the effect of price inefficiency on idiosyncratic risk and stock returns. I finds that price inefficiency in individual stocks contributes to expected idiosyncratic volatility. If idiosyncratic risk is priced, greater price inefficiency could be associated with higher expected returns. Consistent with this hypothesis, this paper then finds a positive relation between price inefficiency and future stock returns. This return premium of price inefficiency is not explained by traditional risk factors, illiquidity, or transactions costs. It is also evidently different from the return bias related to Jensen's inequality. This paper thus provides new insights about the determinants of expected stock returns, and new supporting evidence that idiosyncratic risk is priced. The third essay examines whether the upward return bias generated by Jensen's inequality could lead to better performance of equally-weighted (EW) indexes than value-weighted (VW) index when stock prices are not fully efficient. We find that, for a wide range of U.S. stock indexes, EW indexes deliver better four-factor adjusted returns than VW ones do even after deducting transaction costs. Consistent with our hypothesis that the outperformance of EW indexes comes from mispricing, we find that this outperformance concentrates in stocks with greater mispricing, as measured by deviation of stock prices from random walk. Findings in this essay not only imply a potentially winning investment strategy, but also provide new insight into a long-term debate on causes of the outperformance of the EW indexes. / Ph. D.

Submitted by Diego de Aragão (diegodearagao@gmail.com) on 2011-09-05T18:22:11Z No. of bitstreams: 1 A Eficiência da Precificação e os Erros de Aderência dos ETFs do Mercado Brasileiro final.pdf: 570730 bytes, checksum: 3ba1b8eb71026ac807dc531f68512bd9 (MD5) / Approved for entry into archive by Gisele Isaura Hannickel (gisele.hannickel@fgv.br) on 2011-09-05T18:43:23Z (GMT) No. of bitstreams: 1 A Eficiência da Precificação e os Erros de Aderência dos ETFs do Mercado Brasileiro final.pdf: 570730 bytes, checksum: 3ba1b8eb71026ac807dc531f68512bd9 (MD5) / Approved for entry into archive by Gisele Isaura Hannickel (gisele.hannickel@fgv.br) on 2011-09-05T18:57:16Z (GMT) No. of bitstreams: 1 A Eficiência da Precificação e os Erros de Aderência dos ETFs do Mercado Brasileiro final.pdf: 570730 bytes, checksum: 3ba1b8eb71026ac807dc531f68512bd9 (MD5) / Made available in DSpace on 2011-09-05T19:01:47Z (GMT). No. of bitstreams: 1 A Eficiência da Precificação e os Erros de Aderência dos ETFs do Mercado Brasileiro final.pdf: 570730 bytes, checksum: 3ba1b8eb71026ac807dc531f68512bd9 (MD5) Previous issue date: 2011-08-17 / O objetivo deste trabalho é avaliar a eficiência da precificação e os erros de aderência dos Exchange Traded Funds (ETFs), conhecidos no mercado de capitais como fundos de investimentos abertos listados e comercializados em bolsas de valores. Para esta avaliação, são realizados testes sobre hipóteses acerca da significância estatística dos mispricings entre (1) os valores das cotas patrimoniais e os preços de fechamentos destes ETFs e (2) sobre a diferença entre os preços de fechamento dos ETFs e dos seus índices de referência. A amostra utilizada é dos oito ETFs comercializados no mercado brasileiro de capitais durante o período de realização do trabalho. Como resultado do esforço de pesquisa realizado, o último capítulo mostra uma tendência a distintos níveis de eficiência da precificação e erros de aderência nos ETFs brasileiros. Enquanto alguns ETFs mais líquidos apresentam prêmios/descontos insignificantes estatisticamente, os prêmios/descontos de outros ETFs se mostraram razoavelmente consideráveis. No que tange aos erros de aderência, a média dos erros do ETFs listados localmente mostrou-se em um patamar intermediário entre aqueles ETFs listados no mercado americano e os de uma seleção de ETFs listados em mercados emergentes. / The objective of this study is to evaluate the pricing efficiency and tracking error of Exchange Traded Funds (ETFs), known in the capital market as mutual funds listed and traded on stock markets. For this evaluation, tests are performed on assumptions about the statistical significance of mispricings between (1) the values of equity shares and the closing prices of the ETFs and (2) on the difference between the closing prices of the ETFs and their reference indexes closing prices. The sample is compounded by the eight ETFs that were traded on the Brazilian capital market during the period of the work. As a result of the research effort carried out, the last chapter shows a tendency to different levels of pricing efficiency and tracking errors on Brazilian ETFs. While a few more liquid ETFs presents premium/discounts that are statistically insignificant, some other ETFs’ premium/discounts have proved considerable. With respect to tracking errors, the errors average of ETFs listed locally showed to be in an intermediary level between those ETFs listed in the U.S. market and a selection of ETFs listed in emerging markets.

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