A New Method to Measure the Performance of Leveraged Exchange‐Traded Funds

We examine the effects of daily return compounding, financing costs, and management factors on the performance of leveraged exchange‐traded funds (LETFs) over various holding periods. We propose a new method to measure LETFs’ tracking errors that allows us to disentangle these effects. Our results show that the compounding effect generally has more influence on tracking errors than other factors, especially for long holding periods and in a “sideways” market. The explicit costs (i.e., the expense ratios) and other factors (e.g., financing costs) can materially affect the performance of LETFs, especially for those with high leverage ratios and bear funds.     

Overreaction of country ETFs to US market returns: Intraday vs. daily horizons and the role of synchronized trading

In this paper we study the intraday price formation process of country Exchange Traded Funds (ETFs). We identify specific parts of the US trading day during which Net Asset Values (NAVs), currency rates, premiums and discounts, and the S&P 500 index have special effects on ETF prices, and characterize a special intraday and overnight updating structure between these variables and country ETF prices. Our findings suggest a structural difference between synchronized and non-synchronized trading hours. While during synchronized trading hours ETF prices are mostly driven by their NAV returns, during non-synchronized trading hours the S&P 500 index has a dominant effect. This effect also exceeds the one that the S&P 500 index has on the underlying foreign indices and suggests an overreaction to US market returns when foreign markets are closed.     

Pricing inefficiencies and feedback trading: Evidence from country ETFs

In view of the established presence of wide deviations of US-listed country ETFs' prices from their net asset values, we study whether feedback trading exists in this category of ETFs and whether it varies with their premiums and discounts. Using a sample of nineteen country ETFs for the 2000–2019 window, we find that feedback trading is present in several of them, particularly those targeting Asia Pacific markets. Feedback trading varies with the sign (i.e., premiums and discounts), level, and nature (observed/forecast) of these deviations, as well as prior to and after the outbreak of the 2008 crisis. Of particular note is the widespread feedback trading reported across the vast majority of country ETFs on those days for which there exist successful predictions of premiums/discounts, a fact suggesting that country ETFs' premiums/discounts contain useful information as per their trading dynamics.     

Exchange-traded funds,persistence in tracking errors and information dissemination

We estimate tracking errors from 26 exchange-traded funds (ETFs) utilizing three different methods and test their relative performance using Jensen's model. We find that tracking errors are significantly different from zero and display persistence. Based on Jensen's alpha, risk adjusted returns are significantly inferior to benchmark returns for all ETFs with two exceptions at conventional significance levels revealing that passive investment strategy does not outperform market returns. We then examine the degree to which frequently used factors such as expense ratio, dividends, exchange rate and spreads of trading prices may be underlying sources of tracking errors causing this underperformance. We find that the change in the exchange rate is a significant source of tracking errors. Our serial correlation test, runs test and panel regression analysis reveal that Asian markets display relatively greater persistence and therefore are less efficient in disseminating information and noisier in filtering the information contained in returns.     

From dusk till dawn (and vice versa): Overnight-versus-daytime reversals and feedback trading

Although overnight-versus-daytime return reversals have often been ascribed to the heterogeneous clienteles of the overnight and daytime sessions, there exists no evidence to date on how those clienteles' trading behaviour motivates these reversals. We empirically investigate this issue for the first time by assessing whether these reversals are the result of feedback trading during overnight/daytime hours. Drawing on the S&P 500 ETF for the 1993–2021 period, we find that overnight (daytime) feedback trading largely motivates the expected positive (negative) overnight (daytime) returns; in line with this, days entailing the expected negative overnight-versus-daytime return reversals accommodate stronger feedback trading at the daily (i.e., close-to-close) frequency. Daytime feedback trading is present when the immediately preceding overnight session's returns are positive, while overnight feedback trading reveals a strong Monday-effect. We also show that overnight-versus-daytime variations of feedback trading hold across other large US ETFs.     

TRADING‐VOLUME SHOCKS AND STOCK RETURNS: AN EMPIRICAL ANALYSIS

We examine high‐volume premiums based on weekly risk‐adjusted returns. Significant average weekly abnormal high‐volume premiums up to 0.50% per week are documented for 1962–2005. Most premiums are generated in the first two weeks and monotonically decline as holding periods are extended. Evidence of reversal is found as the holding periods are extended. Premiums depend on realized turnover in the holding period. The last finding supports the theories of Miller and Merton. Finally, we test whether premiums are compensation for taking additional risk. Negative skewness, idiosyncratic risk, and liquidity risk do not explain the high‐volume premiums.     

Measuring time-varying financial market integration: An unobserved components approach

We measure the time-varying degree of world stock market integration of five developed countries (Germany, France, UK, US, and Japan) over the period 1970:1–2011:10. Time-varying financial market integration of each country is measured through the conditional variances of the country-specific and common international risk premiums in equity excess returns. The country-specific and common risk premiums and their conditional variances are estimated from a latent factor decomposition through the use of state space methods that allow for GARCH errors. Our empirical results suggest that stock market integration has increased over the period 1970:1–2011:10 in all countries but Japan. And while there is a structural increase in stock market integration in four out of five countries, all countries also exhibit several shorter periods of disintegration (reversals), i.e. periods in which country-specific shocks play a more dominant role. Hence, stock market integration is measured as a dynamic process that is fluctuating in the short run while gradually increasing in the long run.     

ETF Premiums and Liquidity Segmentation

Exchange traded funds (ETFs) provide a means for investors to access assets indirectly that may be accessible at a high cost otherwise. I show that liquidity segmentation can explain the tendency for ETFs to trade at a premium to net asset value (NAV) as well as the life‐cycle pattern in premiums. ETFs with larger NAV tracking error standard deviations (TESDs) tend to trade at higher premiums and the liquidity benefits offered by foreign ETFs and fixed income ETFs are revealed to be the most valuable to investors. Further tests validate that TESD has the desirable properties of a liquidity segmentation measure.     

市场摩擦对特质风险溢价的影响效应——基于A股主板市场的实证分析

与国外发达市场相比,我国A股主板市场的市场摩擦因素对市场微观结构和资产定价的影响更大。在防范和化解系统性风险的过程中,进一步分析市场摩擦如何作用于特质风险定价效应的问题具有重要的理论和现实意义。本文通过采用多维市场摩擦指标来代理信息不对称、交易成本、买卖限制、卖空限制、风险对冲和外部冲击,检验中国股市特质风险和预期收益率的关系,并判断出市场摩擦因素间的差异性影响机制。回归发现,市场摩擦和特质风险因子(特质波动率和特质偏度)都具有定价效应。各维度市场摩擦因素降低了股票流动性,进而增强了特质波动率的负向定价效应,部分解释了“特质波动率之谜”,但市场摩擦对特质偏度因子溢价的影响较为微弱。同时,基于特质波动率和特质偏度因子的投资策略能够产生超越CAPM、三因子和五因子模型的绝对收益,并印证了市场摩擦对特质风险因子绝对收益的影响作用。     

Relative Liquidity,Fund Flows and Short‐Term Demand: Evidence from Exchange‐Traded Funds

We show that highly liquid Exchange‐Traded Funds (ETFs), especially those that are more liquid than their underlying basket of securities (i.e., positive relative liquidity), are particularly attractive to investors. Using three definitions of liquidity, we find that relative liquidity predicts net fund flows, as well as inflows and outflows positively and significantly. We further document a liquidity clientele among institutional investors: (i) relative liquidity is significantly more important for short‐ than for long‐term investors; and (ii) relative liquidity is inversely related to investors’ average holding duration in the ETFs. These two findings provide evidence that relative liquidity encourages short‐term demand.     

MAX momentum in cryptocurrency markets

This paper studies the MAX effect, the relationship between maximum daily returns and future returns in the cryptocurrency market. The cryptocurrency market is an ideal setting for the MAX effect due to its lottery-like features (i.e., large positive skewness). Contrary to findings in other markets, we demonstrate that cryptocurrencies with higher maximum daily returns tend to achieve higher returns in the future and call this the “MAX momentum” effect. We also find that the magnitude of the MAX momentum effect varies with market conditions, investor sentiment and the underpricing of cryptocurrencies. Additionally, this effect is robust to longer holding periods, different MAX measures and alternative sample selection criteria.     

Premiums,discounts and feedback trading: Evidence from emerging markets' ETFs

This study investigates the extent to which ETFs' premiums and discounts motivate feedback trading in emerging markets' ETFs. Using a sample of the first-ever launched broad-index ETFs from four emerging markets (Brazil, India, South Africa and South Korea), we produce evidence denoting that feedback trading grows in significance in the presence of lagged premiums. The significance of feedback trading becomes more widespread across our sample's ETFs as the lagged premiums grow in magnitude, with evidence also suggesting that the effect of lagged premiums over feedback trading varies prior to and after the outbreak of the recent global financial crisis.     

Do pricing efficiencies in Indian equity ETF market impact its performance?

We examine the pricing efficiency of domestic exchange-traded funds (ETFs) in the Indian equity market where growth co-exists with operating inefficiencies. The ETFs, on average, outperform their fund benchmarks, but the magnitudes of the premium (discount) and tracking error are considerably higher for a synchronously traded market. Among the ETF categories based on fund benchmarks, thematic and broad market ETFs have higher tracking errors and discounts than strategy and sectoral ETFs. We find a nonsignificant negative relationship between discount and redemption units, implying that the creation/redemption process remains unaffected by the prevailing discount in the market. Despite low arbitrage constraints, market participants fail to curtail the prevailing tracking error and discount. This study highlights the operational constraints of arbitrageurs in the Indian ETF market.     

From T-Bills to Stocks: Seasonal Anomalies Revisited

This paper employed eleven data series which consist of stocks, bonds, bills, equity premiums, term premiums, and various default premiums to investigate whether January seasonality reported in existing literature is robust across different states of the economy as this has important trading implications. For the periods 1926–1990, small stocks, small stock premiums, low grade bonds, and default premiums (spread between high grade, low grade and government bonds) reveal January seasonality and that the seasonality is robust across different states of the economy except for low grade bond returns and default premiums. January seasonality for low grade bond returns and low grade bond default premiums are primarily driven by results found during periods of economic expansion. Overall, January seasonality is more evident during the economic expansion periods although the magnitude of default premiums is larger during periods of economic contraction. Furthermore, prior findings of strong summer equity returns are primarily driven by the results found during the periods of economic contraction. It is also found that equity returns are generally higher during periods of economic expansion.     

The efficiency of international information flow: Evidence from the ETF and CEF prices

While similar in their trading and organization, closed-end funds (CEFs) and exchange-traded funds (ETFs) differ in their liquidity and ease of arbitrage. We compare their price transmission dynamics using a sample of funds that invest in foreign securities and are most likely to show the deficiencies in the manner in which they process information. Our analysis shows that ETF returns are more closely related to their portfolio returns than are CEF returns. However, both fund types underreact to portfolio returns but overreact to domestic stock market returns. A simple trading strategy using these results is profitable with roundtrip trading costs less than 1.38% for CEFs and 0.71% for ETFs.     

Can (unusual) weather conditions in New York predict South African stock returns?

This paper investigates the explanatory power of certain weather variables, measured as deviations from their monthly averages, in a leading international financial trading centre, i.e., New York, for South African stock returns, over the daily period January 2nd, 1973 to December, 31, 2015. The empirical results highlight that these unusual deviations of weather variables have a statistically significant negative effect on the stock returns in South Africa, indicating that unusual weather conditions in New York can be used to predict South African stock returns, which otherwise seems to be highly unpredictable. In fact, a forecasting exercise recommends that a trading rule that considers those weather variables through a GARCH modelling approach seems to outperform the random walk model and thus beat the market.     

Short‐ and Long‐Term Effects of Multimarket Trading

We analyze short‐ and long‐term effects of multimarket trading by examining the entries of multiple markets into transacting three ETFs, DIA, QQQ, and SPY. We find that large‐scale entries improve overall market quality, while small‐scale entries have ambiguous effects. Our results show that the competition effect dominates the fragmentation effect over a long horizon and that market fragmentation leads to a decline in trading costs. Further, we find that the order handling rules help mitigate the fragmentation effect and facilitate the competition effect. We do not find that multimarket trading harms price efficiency or increases price volatility.     

Early Movers Advantage? Evidence from Short Selling during After‐Hours on Earnings Announcement Days

We examine short sellers’ after‐hours trading (AHT) following quarterly earnings announcements released outside of the normal trading hours. Our innovation is to use the actual short trades immediately after the announcements. We find that on these earnings announcement days, there is significant shorting activity in AHT relative to shorting activity both during AHT on nonannouncements days and during regular trading sessions around announcements. Short sellers who trade after‐hours on announcement days earn an excess return of 0.82% and 1.40% during before‐market‐open (BMO) and after‐market‐close (AMC)sessions, respectively. The magnitude of these returns increases to 1.48 (3.92%) for BMO (AMC) earnings announcements with negative surprise. We find that the reactive short selling during AHT has information in predicting future returns. Short sellers’ trades have no predictive power if they wait for the market to open to trade during regular hours. In addition, we find that the weighted price contribution during AHT increases with an increase in after‐hours short selling. Overall, our results suggest that short sellers in AHT are informed. Our findings remain robust using alternative holding periods and after controlling for macroeconomic news announcements during BMO sessions.     

Venture capital trusts and the expiration of IPO lock-up provisions

Venture capital trusts (VCTs) were introduced to provide private equity capital for small expanding companies and to promote innovation. Investors in initial public offerings are rewarded with tax relief on the cost of lock-up provisions to stabilize the market. This paper examines the market reaction and trading activity around the expiration of lock-up provisions of 148 VCTs listed on the London Stock Exchange from 1995 to 2006. Downward-sloping demand curve theory suggests that an increased supply of VCT shares at the expiry date could shift their value to a new equilibrium at a lower price. Supporting this prediction, we document evidence of negative abnormal returns as well as permanent increases in the price discount relative to net asset value and trading volumes at and around the expiries of the required holding periods of VCTs. In addition, less negative abnormal returns, lower abnormal discounts and lower abnormal trading volumes are associated with VCTs that invest in AIM-listed companies due to lower information asymmetry, that experience lower prior performance due to a less pronounced disposition effect, and that are subject to a shorter lock-up horizon or are offering more generous tax benefits.     

The settlement day effect in the French Bourse

This article investigates the market-microstructure implications on stock returns and volatility of the settlement procedure of stock transactions. The question is, to what extent can a practical trading rule be implemented around the settlement day, to yield above normal risk-adjusted returns, when settling stock transactions is delayed by several weeks, e.g., a month, on the French stock market? Based on French data for the period 1987–1989 we observed, on average, a positive jump of stock prices between the close of the settlement day and the opening of the next trading day (0.97%) which was significantly greater than the one-month interest rate. The average of daily rates of return for non-settlement days was slightly positive (0.01%). These results are found to be very robust. We thus reach the conclusion that buying stocks on the close of the settlement day and selling them back the next day should have been, on average, a profitable strategy in the French Bourse during the period 1987–1989. However, transaction costs and risk premiums may reduce or even eliminate the recorded profit potential.