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1 – 10 of 37This study examines the investment opportunities available for individual investors in the carbon emissions market. Volume, investment correlations, location of trade, return…
Abstract
This study examines the investment opportunities available for individual investors in the carbon emissions market. Volume, investment correlations, location of trade, return volatility, and price discovery are examined for the Barclays carbon emissions exchange traded note (ETN) launched in July of 2008 and traded in U.S. markets. Our main findings indicate this new type of asset evidences diversification benefits for individual investors. Its main source of volatility and price discovery is the underlying European futures carbon market.
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Michael O'Neill and Gulasekaran Rajaguru
The authors analyse six actively traded VIX Exchange Traded Products (ETPs) including 1x long, −1x inverse and 2x leveraged products. The authors assess their impact on the VIX…
Abstract
Purpose
The authors analyse six actively traded VIX Exchange Traded Products (ETPs) including 1x long, −1x inverse and 2x leveraged products. The authors assess their impact on the VIX Futures index benchmark.
Design/methodology/approach
Long-run causal relations between daily price movements in ETPs and futures are established, and the impact of rebalancing activity of leveraged and inverse ETPs evidenced through causal relations in the last 30 min of daily trading.
Findings
High frequency lead lag relations are observed, demonstrating opportunities for arbitrage, although these tend to be short-lived and only material in times of market dislocation.
Originality/value
The causal relations between VXX and VIX Futures are well established with leads and lags generally found to be short-lived and arbitrage relations holding. The authors go further to capture 1x long, −1x inverse as well as 2x leveraged ETNs and the corresponding ETFs, to give a broad representation across the ETP market. The authors establish causal relations between inverse and leveraged products where causal relations are not yet documented.
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Tim Leung and Brian Ward
The purpose of this study is to understand the tracking errors of leveraged exchange-traded funds (LETFs) on gold and demonstrate improved tracking performance by dynamic…
Abstract
Purpose
The purpose of this study is to understand the tracking errors of leveraged exchange-traded funds (LETFs) on gold and demonstrate improved tracking performance by dynamic portfolios of gold futures.
Design/methodology/approach
The author formulates and solves a constrained quadratic minimization problem to construct static replicating portfolios of both leveraged and unleveraged benchmarks in gold; a dynamic constant leveraged portfolio using gold futures is used to track the path of the leveraged gold benchmark.
Findings
The results suggest that market-traded LETFs do not track a leveraged position in gold effectively over a long horizon, and the dynamic leveraged futures portfolio achieves lower tracking errors over multiple years.
Research limitations/implications
The research informs us that investors should consider alternative portfolios with gold futures, rather than holding a leveraged gold exchange-traded funds to achieve a desired leveraged exposure in spot gold.
Originality/value
The main contribution of the study is the use of gold futures to dynamically replicate a gold benchmark with any given leverage ratio and the detailed comparison of the tracking performance of LETFs versus optimal static and dynamic futures portfolios.
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Reena Aggarwal and Laura Schofield
Exchange traded funds (ETFs) are one of the most innovative financial products listed on exchanges. As reflected by the size of the market, they have become popular among both…
Abstract
Purpose
Exchange traded funds (ETFs) are one of the most innovative financial products listed on exchanges. As reflected by the size of the market, they have become popular among both retail and institutional investors. The original ETFs were simple and easy to understand; however, recent products, such as leveraged, inverse, and synthetic ETFs, are more complex and have additional dimensions of risk. The additional risks, complexity, and reduced transparency have resulted in heightened attention by regulators. This chapter aims to increase understanding of how ETFs function in the market and can potentially impact financial stability and market volatility.
Design/methodology/approach
We discuss the evolution of ETFs, growing regulatory concerns, and the various responses to these concerns.
Findings
We find that concerns related to systemic risk and excess volatility, suitability for retail investors, lack of transparency and liquidity, securities lending and counterparty exposure are being addressed by both market participants and policy makers. There has been a shift toward multiple counterparties, overcollateralization, disclosure of collateral holdings and index holdings.
Originality/value
The analysis contained in this chapter provides an understanding of the role of ETFs in the financial markets and the global economy that should be valuable to market participants, investors, and policy makers.
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This paper aims to provide the necessity to activate long-term exchange-traded derivatives (ETD) in Korea. In the era of aging, low interest rates and low economic growth, the…
Abstract
Purpose
This paper aims to provide the necessity to activate long-term exchange-traded derivatives (ETD) in Korea. In the era of aging, low interest rates and low economic growth, the investment demand for long-term financial products, and its hedging demand have steadily increased. Unfortunately, long-term ETD do not trade in Korea, and this study presents political suggestions to invigorate long-term ETD based on overseas cases and empirical analysis. Specifically, this study suggests the necessity to activate exchange traded funds (ETFs) options, long-term Korea treasury bond futures and options and long-term Volatility Index of Korea Composite Stock Price Index future and options. The introduction of those long-term ETD not only contributes to providing long-term investment and hedging vehicles but also reduces market inefficiencies in the Korean industry of ETFs, bonds and structured products.
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D. Eli Sherrill and Kate Upton
The purpose of this paper is to study if actively managed exchange-traded funds (AMETFs) and actively managed mutual funds (AMMFs) are complements or substitutes. It also tests if…
Abstract
Purpose
The purpose of this paper is to study if actively managed exchange-traded funds (AMETFs) and actively managed mutual funds (AMMFs) are complements or substitutes. It also tests if there are tax or liquidity clientele effects.
Design/methodology/approach
The study investigates the relation between individual AMMF flows and aggregate AMETF flows as well as individual AMETF flows and aggregate AMMF flows. A 2013 tax change is used to analyze if a tax clientele effect exists between the AMETF and AMMF markets. The authors use differences in investor groups for institutional vs retail fund share classes to test for liquidity clientele effects.
Findings
The authors find that equity and mixed AMETFs and AMMFs are substitutes, although not perfect substitutes. Taxation-related differences between the two products create a clientele effect for fixed income and mixed funds where tax-sensitive investors are more likely to substitute AMETFs for AMMFs surrounding tax increases. There is weak evidence that institutional investors may prefer AMETFs more than retail investors because of their enhanced liquidity.
Originality/value
This is the first study to investigate the flow relation between AMETFs and AMMFs. The fast-paced growth of the AMETF area coupled with the substitutability between the two products and tax advantages of AMETFs has the capability to gain significant market share from AMMFs in the future.
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The purpose of this paper is to provide a brief review of three strands of the literature on exchange‐traded funds.
Abstract
Purpose
The purpose of this paper is to provide a brief review of three strands of the literature on exchange‐traded funds.
Design/methodology/approach
The paper starts with a review of the history of the growth of exchange‐traded funds and their characteristics. The paper then examines the key factors and findings of the existing studies on, respectively, the pricing efficiency, the tracking ability/performance, and the impact on underlying securities of exchange‐traded funds.
Findings
Although there has been a substantial amount of research conducted to advance our knowledge on the trading, management, and effect of exchange‐traded funds, the findings are still far from conclusive in addressing a number of research questions.
Practical implications
Investors and other market participants will find this review informative in enhancing the understanding of exchange‐traded funds.
Originality/value
By highlighting the general theme of the related research findings, the paper provides a systematic review of the existing literature that future researchers can utilize in developing their research agenda.
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Hunter Matthew Holzhauer, Xing Lu, Robert W. McLeod and Jamshid Mehran
– This study aims to look into how volatility significantly impacts the tracking error for daily-rebalanced leveraged bull and bear ETFs.
Abstract
Purpose
This study aims to look into how volatility significantly impacts the tracking error for daily-rebalanced leveraged bull and bear ETFs.
Design/methodology/approach
Using Morningstar return data and Chicago Board Options Exchange (CBOE) volatility index (VIX) data, the paper examines the daily tracking error for leveraged bull and bear ETFs. Tracking error is defined as the difference between the daily returns for a leveraged bull or bear ETF and the multiple of the daily return for that ETF's respective underlying benchmark index.
Findings
Changes in the market VIX of the CBOE have a significant and opposite effect on the daily returns for both leveraged bull and bear ETFs. Furthermore, these effects are more pronounced for bear ETFs than similarly leveraged bull ETFs.
Research limitations/implications
The sample period (June 19, 2006 to September 22, 2009) contains periods of extraordinarily high volatility. Considering that the VIX reached an all-time high during this period, the results may be time-period specific and may not translate to other time periods.
Practical implications
The implication is that market timing may be feasible for enhancing daily returns for both leveraged bull and bear ETFs. However, any specific timing strategies go beyond the scope of this paper.
Originality/value
In this study, the paper examined the effects of expected market volatility on the daily tracking error of leveraged bull and bear ETFs. Specifically, the paper performed multiple linear regression analysis using Morningstar return data for the ETFs and their underlying benchmark and CBOE VIX data. The findings suggest that market timing could be beneficial for increasing daily yields for leveraged and inverse ETFs.
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