|
Archive@NYU >
Stern School of Business >
Salomon Center >
Derivatives Research >
Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26827
|
| Title: | PRICING EXCHANGE TRADED FUNDS |
| Authors: | Engle, Robert
Sarkar, Debojyoti |
| Issue Date: | May-2002 |
| Series/Report no.: | S-DRP-02-11 |
| Abstract: | Exchange Traded Funds are equity issues of companies whose assets
consist entirely of cash and shares of stock approximating particular
indexes. These companies resemble closed end funds except for the unique
feature that additional shares can be created or redeemed by a number of
registered entities. This paper investigates the extent and properties
of the resulting premiums and discounts of ETFs from their fair market
value. Measured premiums and discounts can be misleading because the
net asset value of the portfolio is not accurately represented or
because the price of the fund is not accurately recorded. These features
are incorporated into a model with errors-in-variables that accounts for
these effects and measures the standard deviation of the remaining
pricing errors. Time variation in this standard deviation is
investigated. Both domestic and international ETFs are examined, each
from an end-of-day perspective and from a minute-by-minute intra-daily
framework. The overall finding is that the premiums/discounts for the
domestic ETFs are generally small and highly transient, once mismatches
in timing are accounted for. Large premiums typically last only several
minutes. The standard deviation of the premiums/discount is 15 basis
points on average across all ETFs, which is substantially smaller than
the bid-ask spread. For international ETFs, the findings are not so
dramatic. Premiums and discounts are much larger and more persistent,
frequently lasting several days. The spreads are also much wider and are
comparable to the standard deviation of the premiums. This finding is
insensitive to the timing of overlap with the foreign market, the use of
futures data, or different levels of time scale. In fact there are only
a small number of trades and quote changes in a typical day for most of
these funds. An explanation for this difference may rest with the higher
cost of creation and redemption for the international products.
Nevertheless, when compared with closed end funds where there are no
opportunities for creation or redemption, the ETFs have smaller and less
persistent premiums and discounts. The implication is that the pricing
of ETFs is highly efficient for the domestic products and somewhat less
precise for the international funds since they face more complex
financial transactions and risks. |
| URI: | http://hdl.handle.net/2451/26827 |
| Appears in Collections: | Derivatives Research
|
All items in Faculty Digital Archive are protected by copyright, with all rights reserved.
|
