Stoyu I. Ivanov

High-frequency analysis of exchange traded funds' pricing deviation

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.

Analysis of the effects of ESOP adoption on the company cost of capital

Purpose – The purpose of this study is to examine whether employee stock ownership plans (ESOPs) add or destroy value from a new perspective by examining the relation of the adoption of ESOP and the company cost of capital.Design/methodology/approach – The capital asset pricing model is used to estimate the companys cost of equity capital, and the cost of debt is estimated using bond yield spreads. The weighted average cost of capital (WACC) is calculated as the weighted percentage of the firm funded by equity, preferred stock, and debt multiplied by the individual costs of capital. Univariate and multivariate analyses are conducted around the event of adoption to determine if the cost of capital changes after the adoption of ESOP.Findings – Results from the univariate analysis show that firms adopting leveraged as well as non‐leveraged ESOP plans experience decreases in costs of equity and debt capital as well as decreases in their WACC. However, the multivariate analysis demonstrates that only the non‐...

Study of REIT ETF beta

Purpose - The aim of this study is to examine real estate investment trust exchange-traded funds (REIT ETFs) and test for the existence of the “asymmetric beta puzzle” phenomenon in these financial instruments that are relatively new and are gaining popularity. The “asymmetric beta puzzle” phenomenon is used to identify the hedging and diversification benefits of a financial instrument. “Asymmetric beta puzzle” exists when betas in declining markets are higher than betas in advancing markets. Design/methodology/approach - To study 14 REIT ETFs by using monthly and daily Center for Research in Security Prices (CRSP) data. Capital asset pricing model (CAPM) and Fama–French three-factor model were used to estimate betas in REIT ETFs and those in advancing and declining markets. Both the S&P 500 and the CRSP value-weighted indices were used in the beta estimation. Two hypotheses with regard to betas in both advancing and declining markets were defined and tested to test for the existence of the “asymmetric beta puzzle” phenomenon. Findings - This study confirms the presence of the “asymmetric beta puzzle” in the data of monthly REIT ETFs as documented by Goldstein and Nelling (1999) and Chatrath Originality/value - Goldstein and Nelling (1999) and Chatrath

Analysis of the factors impacting ETFs net fund flow changes

Purpose - The purpose of this study is to identify the factors that impact the exchange-traded funds net fund flow changes on a daily basis. Design/methodology/approach - A total of 1,212 different exchange-traded funds with a proprietary daily net fund flow data and logistic regressions were studied because the majority of the 1,212 exchange-traded funds have mostly zero daily net fund flow changes. Findings - It was documented that in the period December 22, 2005 to July 28, 2010 autocorrelation at the daily frequency is not universally present for the 1,212 exchange-traded funds that we study, despite the fact that this is the case in the monthly data documented in prior studies. No support was found for the feedback trading hypothesis but some support was found for the contrarian investor hypothesis on daily basis, even though the opposite is ascertained for both in the prior literature monthly data. Also, it cannot be concluded that tracking error prompts net fund flow changes and thus arbitrage activity. Originality/value - The paper contributes to the ongoing analysis of the factors influencing investment companies fund flow changes, which has mostly focused on open-end funds and monthly data so far. Considering the increased scope and relevance of exchange-traded funds in today’s financial markets, this study fills a void in the fund flow changes literature.

Analysis of SOXX tracking error

The purpose of this study is to add to the existing knowledge in the field of ETF performance by examining the performance of a relatively new equity ETF-SOXX - the iShares PHLX SOX Semiconductor Sector Index Fund relative to the performance of the oldest and most popular ETF, the Spider. Our study examines the periods of and around the Great Recession. When tracking error is examined in absolute terms the SOXX tracking errors are ten times and four times higher in the Before and During periods than the Spider tracking errors. In the After period the SOXX tracking error becomes negative, which suggests destruction of value in general and relative to the larger ETF. However, when we examine the temporal behaviour of these two ETFs, tracking errors, we document some similarities. We document that for both SOXX and Spider ETFs the simple AR(1) model specification best fits the behaviour of the tracking error for all three periods and that the AR(1) coefficients are similar.

Intraday analysis of currency ETFs

Purpose – The purpose of this paper is to find if erosion of value exists in grantor trust structured exchange traded funds. The author examines the performance of six currency exchange traded funds’ tracking errors and pricing deviations on intradaily-one-minute interval basis. All of these exchange traded funds are grantor trusts. The author also studies which metric is of more importance to investors in these exchange traded funds by examining how these performance metrics are related to the exchange traded funds’ arbitrage mechanism. Design/methodology/approach – The Australian Dollar ETF (FXA) is designed to be 100 times the US Dollar (USD) value of the Australian Dollar, the British Pound ETF (FXB) is designed to be 100 times the USD value of the British Pound, the Canadian Dollar ETF (FXC) is designed to be 100 times the USD value of the Canadian Dollar, the Euro ETF (FXE) is designed to be 100 times the USD value of the Euro, the Swiss Franc ETF (FXF) is designed to be 100 times the USD value of t...

Analysis of the QQQ spot and option volatility behaviour around the QQQ move from AMEX to NASDAQ

In this paper, we study the behaviour of QQQ volatility in the spot and option markets around QQQs move from AMEX to NASDAQ on 1 December 2004. We test whether the QQQ option implied volatility has changed around this event and whether this was a result of a change in spot volatility or hedging demand. We find that indeed the QQQ option implied volatility has changed around the time of the move. We document that neither QQQ spot volatility nor speculation has had an impact on the implied volatility change. We find that investor hedging activity is the driving force behind this change, in support of Bollen and Whaleys net buying pressure hypothesis. To the best of our knowledge, analysis of spot and option markets around moves of trading from one exchange to another and name changes have not been done before.