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Article
Publication date: 12 April 2013

Narat Charupat and Peter Miu

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.

Details

Managerial Finance, vol. 39 no. 5
Type: Research Article
ISSN: 0307-4358

Keywords

Content available
Article
Publication date: 12 April 2013

Peter Miu and Narat Charupat

Abstract

Details

Managerial Finance, vol. 39 no. 5
Type: Research Article
ISSN: 0307-4358

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Book part
Publication date: 4 March 2008

C. Sherman Cheung, Clarence C.Y. Kwan and Peter C. Miu

In response to common criticisms on the appropriateness of mean-variance in asset allocation decisions involving hedge funds, we offer a mean-Gini framework as an…

Abstract

In response to common criticisms on the appropriateness of mean-variance in asset allocation decisions involving hedge funds, we offer a mean-Gini framework as an alternative. The mean-Gini framework does not require the usual normality assumption concerning return distributions. We also evaluate empirically the differences in allocation outcomes between the two frameworks using historical data. The differences turn out to be significant. The evidence thus confirms the inappropriateness of the mean-variance framework and enhances the attractiveness of mean-Gini for this asset class.

Details

Research in Finance
Type: Book
ISBN: 978-1-84950-549-9

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Article
Publication date: 12 April 2013

Dennis Y. Chung and Karel Hrazdil

The aim of this paper is to examine the informational efficiency of prices of all exchange traded funds (ETFs) that are actively traded on the NYSE Arca, based on…

Abstract

Purpose

The aim of this paper is to examine the informational efficiency of prices of all exchange traded funds (ETFs) that are actively traded on the NYSE Arca, based on methodology developed by Chordia et al.

Design/methodology/approach

The authors estimate the speed of convergence to market efficiency based on short‐horizon return predictability from past order flows of 273 ETFs that were traded every day on the NYSE Arca during the first six months of 2008, and compare the resulting price formation process to that of shares traded on the NYSE and NYSE Arca.

Findings

Despite the significant differences in trading costs, volatility, and informational effects between ETFs and regular stocks, the paper documents that price adjustments to new information for ETFs occur in about 30 minutes, which is comparable to price adjustments for traditional stocks traded on Arca. In multivariate setting, the paper further shows that the speed of convergence to market efficiency of ETFs is not only significantly driven by volume, but also by the probability of informed trading.

Research limitations/implications

The findings provide direct answers and insights to questions posed in a recent SEC concept release document. The analysis of the speed of convergence provides a feasible measure to assess how efficiently prices of ETFs respond to new information.

Originality/value

The authors are first to utilize the short‐horizon return predictability from historical order flow approach to evaluate the price formation process of ETFs and to provide evidence on the determinants of its efficiency.

Details

Managerial Finance, vol. 39 no. 5
Type: Research Article
ISSN: 0307-4358

Keywords

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Article
Publication date: 12 April 2013

Pauline M. Shum and Jisok Kang

Leveraged and inverse ETFs (hereafter leveraged ETFs) have received much press coverage of late due to issues with their performance. Managers and the media have focused…

Abstract

Purpose

Leveraged and inverse ETFs (hereafter leveraged ETFs) have received much press coverage of late due to issues with their performance. Managers and the media have focused investors' attention on the impact of compounding, when the funds are held for more than one day. The aim of this paper is to lay out a framework for assessing the performance of leveraged ETFs.

Design/methodology/approach

The authors propose a simple way to disentangle the effect of compounding and that of the management of the fund and the trading premiums/discounts, all of which affect investors' bottom line. The former is influenced by the effectiveness and the costs of the manager's (synthetic) replication strategy and the use of leverage. The latter reflects liquidity and the efficiency of the market.

Findings

The paper finds that tracking errors were not caused by the effects of compounding alone. Depending on the fund, the impact of management factors can outweigh the impact of compounding, and substantial premiums/discounts caused by reduced liquidity during the financial crisis further distorted performance.

Originality/value

The authors propose a framework for practitioners to evaluate the performance of leveraged ETFs. This framework highlights a very topical issue, that of the impact of synthetic replication, which all leveraged ETFs use. Financial regulators such as the SEC and the Financial Stability Board have all taken issue with synthetically replicated ETFs. In leveraged ETFs, this issue is masked by the effects of compounding. The framework the authors propose allows investors to disentangle the two effects.

Details

Managerial Finance, vol. 39 no. 5
Type: Research Article
ISSN: 0307-4358

Keywords

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Book part
Publication date: 27 June 2014

C. Sherman Cheung and Peter Miu

Real estate investment has been generally accepted as a value-adding proposition for a portfolio investor. Such an impression is not only shared by investment…

Abstract

Real estate investment has been generally accepted as a value-adding proposition for a portfolio investor. Such an impression is not only shared by investment professionals and financial advisors but also appears to be supported by an overwhelming amount of research in the academic literature. The benefits of adding real estate as an asset class to a well-diversified portfolio are usually attributed to the respectable risk-return profile of real estate investment together with the relatively low correlation between its returns and the returns of other financial assets. By using the regime-switching technique on an extensive historical dataset, we attempt to look for the statistical evidence for such a claim. Unfortunately, the empirical support for the claim is neither strong nor universal. We find that any statistically significant improvement in risk-adjusted return is very much limited to the bullish environment of the real estate market. In general, the diversification benefit is not found to be statistically significant unless investors are relatively risk averse. We also document a regime-switching behavior of real estate returns similar to those found in other financial assets. There are two distinct states of the real estate market. The low-return (high-return) state is characterized by its high (low) volatility and its high (low) correlations with the stock market returns. We find this kind of dynamic risk characteristics to play a crucial role in dictating the diversification benefit from real estate investment.

Details

Signs that Markets are Coming Back
Type: Book
ISBN: 978-1-78350-931-7

Keywords

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Article
Publication date: 12 April 2013

Stoyu I. Ivanov

The purpose of this study is to extend the work of DeFusco, Ivanov and Karels by examining pricing deviation of DIA, SPY and QQQQ on intradaily basis.

Abstract

Purpose

The purpose of this study is to extend the work of DeFusco, Ivanov and Karels by examining pricing deviation of DIA, SPY and QQQQ on intradaily basis.

Design/methodology/approach

The DIA is designed to be one hundredth of the DJIA, the SPY is designed to be one tenth of the S&P 500 and QQQQ is designed to be one fortieth of the NASDAQ 100. This feature of ETFs requires the estimation of the difference between the proportional level of the index and the price of the ETF, which is the ETF pricing deviation.

Findings

The paper finds that the DIA, SPY and QQQQ pricing deviations are 0.0429, −0.0743 and 0.4298, respectively. The findings indicate that the prices of DIA and QQQQ are on average lower than the underlying indexes. SPY is the exception having a price which is higher than the theoretical price of the S&P 500 index. The author finds that this is due to the increased demand for the SPY. Additionally, the paper provides an explanation for the large change (increase) in the pricing deviation of QQQQ after December 1, 2004 which DeFusco, Ivanov and Karels could not explain. On December 1, 2004 QQQQ trading was consolidated on NASDAQ. The paper finds negative growth in the volume of QQQQ after December 1, 2004 indicating decrease in popularity of this ETF. The decrease in popularity of QQQQ might explain the increase in its pricing deviation.

Research limitations/implications

The paper uses high frequency data in the analysis of pricing deviation which might be artificially deflating standard errors and thus inflating the t‐test significance values.

Originality/value

The paper contributes to the ongoing search in the finance literature of precision ETF performance metrics.

Details

Managerial Finance, vol. 39 no. 5
Type: Research Article
ISSN: 0307-4358

Keywords

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Article
Publication date: 12 April 2013

Naresh Bansal, Ryan McKeon and Marko Svetina

The purpose of this paper is to investigate the extent to which introduction of ETFs reduces short‐sale constraints in their constituent stocks.

Abstract

Purpose

The purpose of this paper is to investigate the extent to which introduction of ETFs reduces short‐sale constraints in their constituent stocks.

Design/methodology/approach

First, the introduction of ETFs increases short interest for stocks that they hold. Second, the increase in short interest is highest for the stocks that were most short‐sale constrained. Third, subsequent additions of a stock to an ETF will have a lesser impact on short interest than the first time additions. Finally, using matched control sample and regression analysis approaches, the authors make sure that their results are robust to determinants of short‐selling activity which extant research has found to be relevant.

Findings

When a stock is included in an ETF for the first time, the paper finds that the average monthly short‐selling activity of the stock in the six months following ETF‐inclusion is, on average, 33 percent higher than that in six months prior to the inclusion. This effect is the strongest for stocks that are most short‐sale constrained. The analysis of subsequent additions of stocks to ETFs reveals that the effect of increased short‐selling activity is significantly attenuated when compared to the first‐time additions. All of the findings are robust to the matched sample comparisons and multiple regression analysis that account for determinants of short‐selling activity.

Originality/value

This paper shows that: the introduction of ETFs helps relax short‐sale constraints in the market; that the extent to which a stock's outstanding shares are held by one or more ETFs serves as a proxy for the degree to which stocks are short‐sale constrained; and implies that the introduction of ETFs makes the prices of the funds' underlying securities more efficient.

Details

Managerial Finance, vol. 39 no. 5
Type: Research Article
ISSN: 0307-4358

Keywords

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Book part
Publication date: 26 April 2011

C. Sherman Cheung and Peter C. Miu

Using a market model of international equity returns, which fully incorporates the regime switching and heteroskedasticity effects, we conduct an empirical study on the…

Abstract

Using a market model of international equity returns, which fully incorporates the regime switching and heteroskedasticity effects, we conduct an empirical study on the asymmetric behavior of 31 emerging equity markets across the different regimes of both the global and the local markets. Asymmetric correlation is found to be much weaker than that among developed markets as documented in the recent studies. There is little evidence of performance enhancement by possessing information on asymmetric correlation in international asset allocation strategies involving emerging markets.

Details

Research in Finance
Type: Book
ISBN: 978-0-85724-541-0

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Book part
Publication date: 27 June 2014

Abstract

Details

Signs that Markets are Coming Back
Type: Book
ISBN: 978-1-78350-931-7

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