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Excess comovement and limits-to-arbitrage: evidence from exchange-traded funds (2012).
| Content Provider | CiteSeerX |
|---|---|
| Author | Broman, Markus S. Shum, Pauline Tian, Yisong Bae, Kee-Hong |
| Abstract | The prices of Exchange-Traded Funds can deviate from their Net Asset Values by the magnitude of arbitrage costs, such as transaction and holding costs. Despite the explicit “in-kind ” arbitrage mechanism that exists for ETFs, I find that ETF mispricing mean-reverts only partially; moreover, mispricing increases not only with proxies for aggregate market illiquidity, but also for ETFs with high arbitrage costs, particularly during the financial crisis. As long as mispricing remains within the arbitrage costs boundaries, there is limited pressure to correct for any price discrepancies, which may leave the ETF partially exposed to a common factor. Consistent with this prediction and with recent theoretical work on the effects of commonality in trading patterns, I find strong evidence of comovement among excess ETF returns (i.e. after correcting for movements in the fundamentals, the NAV) within three investment styles – size, value-growth and ETF liquidity. |
| File Format | |
| Publisher Date | 2012-01-01 |
| Access Restriction | Open |
| Subject Keyword | Exchange-traded Fund Excess Comovement Financial Crisis Limited Pressure Arbitrage Cost Holding Cost Net Asset Value Price Discrepancy Recent Theoretical Work High Arbitrage Cost Excess Etf Return Explicit In-kind Arbitrage Mechanism Strong Evidence Investment Style Size Etf Liquidity Aggregate Market Illiquidity Common Factor Trading Pattern |
| Content Type | Text |
