Arbitrage,Liquidity, and the Valuation of Exchange Traded Funds |
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| Authors: | Lucy F. Ackert Yisong S. Tian |
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| Affiliation: | 1. Department of Economics and Finance, Coles College of Business, Kennesaw State University, 1000 Chastain Road, Kennesaw, GA 30144. Phone: (770) 423‐6111;2. fax: (770) 499‐3209;3. lackert@kennesaw.edu;4. Schulich School of Business, York University, 4700 Keele Street, Toronto, Ontario, Canada M3J 1P3. Phone: (416) 736‐2100;5. ytian@schulich.yorku.ca |
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| Abstract: | This paper investigates the performance of U.S. and country exchange traded funds currently traded in the United States and provides new insight into their pricing. While the U.S. funds are priced closely to their net asset values, the country funds are not and can exhibit large, positive autocorrelations in fund premium. The mispricing of country funds is related to momentum, illiquidity, and size effects. We also find an inverted U‐shaped relationship between fund premium and market liquidity, which suggests that more active trading does lead to lower mispricing but only after a certain level of liquidity is reached. |
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