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Three Essays on the Microstructure of Exchange Traded Funds

Three Essays on the Microstructure of Exchange Traded Funds
Author: Van Thuan Nguyen
Publisher:
Total Pages: 153
Release: 2005
Genre:
ISBN: 9781109846362
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The second essay examines competition among exchanges for order flow in ETFs. We find that ECNs dominate the market for ETFs. Besides providing superior prices to investors, ECNs also offer non-price services such as speedy execution and anonymity. Given the superior execution services on ECNs and the low adverse selection costs in ETF markets, liquidity traders also trade on ECNs. The results suggest that ECNs satisfy both liquidity and informed traders in the market for ETFs and this explains why they gain substantial order flow. We also find that quote-based competition is prevalent in the market for ETFs. Overall, our study supports the view that multimarket trading is a desirable development that helps cater to investors' diverse needs.

Essays on Price Discovery Measure, Exchange-traded Funds and Liquidity

Essays on Price Discovery Measure, Exchange-traded Funds and Liquidity
Author: Syed Galib Sultan
Publisher:
Total Pages: 87
Release: 2015
Genre:
ISBN:
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Price Discovery is the process by which new information is impounded into asset prices through trading activity. A market is considered to contribute more to price discovery if it is the first to capture new information regarding the fundamental value of an asset. Hasbrouck's (1995) information share (IS) is the most widely used measure for price discovery contribution even though there is a well-documented concern with identification: its dependence on the ordering of the variable in the price vector and its non-uniqueness. In the first chapter, we propose a new measure, "Price Discovery Share" (PDS) that is closely related to IS and resolves the identification problems inherent in the IS method. PDS is motivated by a widely used method in risk management literature called the "risk-budgeting" or additive decomposition of portfolio volatility. Using simulated data based on different structural asset pricing models, we find that PDS measures the structural price discovery contribution more accurately than IS. In the second chapter, we apply Price Discovery Share (PDS) to investigate the "duplication of Exchange-Traded Funds (ETFs)" phenomenon, a recent institutional trend in financial markets. We show that although there are multiple ETFs tracking the S&P 500 index, one specific S&P 500 ETF ('SPY') always contributes more to price discovery than the rest. We also find that PDS, unlike Information Share (IS), is robust to the use of intra-day market price data sampled at different frequencies. In the third chapter, we study the effect of bond Exchange-traded funds (ETFs) and bond mutual funds on the liquidity of U.S. corporate bonds. Depending on the liquidity measure used, we find different statistically significant results. ETF ownership has a positive impact on their underlying corporate bonds liquidity when we only consider bonds that are already bought and held by ETFs. Bond mutual funds ownership is found to play a positive impact on the liquidity of high yield corporate bonds.

The ETF Handbook

The ETF Handbook
Author: David J. Abner
Publisher: John Wiley & Sons
Total Pages: 340
Release: 2016-07-27
Genre: Business & Economics
ISBN: 1119193915
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Professional-level guidance on effectively trading ETFs in markets around the world The ETF Handbook is a comprehensive handbook for using Exchange Traded Funds, designed specifically for institutional investors and professional advisors seeking to improve ETF profitability. While ETFs trade like stocks, they are not stocks—and the differences impact every aspect of their use. This book provides full guidance toward effectively monitoring, analyzing, and executing ETFs, including the technical details you won't find anywhere else. You'll learn how they work, where they fit, and who is using them, as well as the resources that exist to provide access for investors. This new second edition includes updated coverage on how business has moved from niche to mainstream, ETF performance and issuers around the world, and changes to the users of ETFs in the US. The companion website features instructional video, as well as ready-to-use spreadsheets for calculating NAV and IIV. Most of the literature surrounding ETFs is geared toward individual investors or traders, but this book is written from the professional perspective—complete with the deeper mechanical information professionals require. Learn the analysis and execution methods specific to ETFs Discover why ETFs require a sophisticated level of skill Consider how ETFs perform in different market environments Examine the impact of managed ETF portfolio growth ETFs are incredibly flexible and valuable tools, but using them effectively demands a more sophisticated skillset, even among professional money managers and traders. Daily volumes and spreads do not tell the full story regarding availability and liquidity, and treating ETFs just like stocks can dramatically impact profits. The ETF Handbook is the professional's guide to the ETF markets worldwide with expert insight on the technical details that matter.

Three Essays on Exchange-Traded Funds

Three Essays on Exchange-Traded Funds
Author: Samuel Johnstone Hempel
Publisher:
Total Pages: 0
Release: 2020
Genre:
ISBN:
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Chapter 1 The rise of exchange-traded funds (ETFs) has attracted significant attention from investors, regulators, and academics alike. Despite the widely asserted importance of authorized participants (APs) to ETFs' structure and function, little is known about the effects of AP behavior on ETFs and ETFs' underlying assets. Using AP-identified regulatory data from FINRA, I show that APs' inventories do not affect ETF prices, contrary to past inventory literature. I find that when APs are inventory-neutral, liquidity shocks to the ETF do not transmit to the underlying assets. These results are largely unchanged in a high-volatility subsample, although there is some concern for thinly traded ETFs. In a daily panel, I show that APs' inventories are associated with their decisions to create or redeem ETF shares. These results suggest that the unique features of APs may benefit ETF market participants, especially in more liquid ETFs. Chapter 2 Exchange-traded funds (ETFs) trade throughout the day, just like their underlying securities. Yet the simple problem of knowing an ETF's underlying portfolio value during the day has been elusive in publicly available data. I develop a new regression- based method to compute the ex-post underlying portfolio value of a US passive equity ETF on an intraday basis. Using widely available data, this method improves in three ways over the most popular method to date (intraday indicative values): (1) Higher time resolution, (2) No stale prices, and (3) Visibility of the underlying bid-ask spread. I also provide a LASSO version of the method, and I validate the results using official portfolio data from the DTCC, a large central clearinghouse for ETFs and their underlying securities. Chapter 3 Leveraged exchange-traded funds (Leveraged ETFs) advertise the ability to replicate the daily return of a given index on a levered or inverse basis. These products are highly risky, and the costs of trading leveraged ETFs are quite substantial, raising questions about which types of traders would choose to use them. I use confidential regulatory data to identify institutional and retail order flow in ETFs, and I demonstrate that institutional order flow to leveraged ETFs is uninformed.

Three Essays on Exchange-traded Funds

Three Essays on Exchange-traded Funds
Author: Daniel Elijah Sherrill
Publisher:
Total Pages: 118
Release: 2014
Genre: Electronic dissertations
ISBN:
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This dissertation consists of three essays on exchange-traded funds (ETFs). The dissertation research seeks to contribute to a deeper understanding of the impact of ETFs upon the financial markets, discover insights into the realm of performance persistence, and identify the factors leading to ETF liquidations. The first essay investigates the impact that sector exchange-traded funds have upon stocks that they hold. We find that sector ETF ownership is associated with stock return comovement, especially with other industry stocks that are also held by sector ETFs. We show that sector ETF ownership is related to a muted abnormal return and trading volume reaction to earnings surprises. Even when considering other types of institutional investors, sector ETFs appear to be the main driver behind these findings. The second essay documents the existence of ETF performance persistence. This calls into question interpretations used in the mutual fund literature suggesting performance persistence is evidence of manager skill. Given their passive nature, performance persistence should not exist amongst ETFs if the sole source of this persistence is manager skill. A decomposition of performance into stock composition and industry exposure sources reveals that this persistence is attributable predominately to a fund's industry exposure. Furthermore, the underlying source of the persistence is a flow-driven return effect where fund flows place price pressure on stocks leading to persistence in fund returns. An industry flow-based explanation best accounts for positive persistence of winners while stock flow-based reasons better explain persistence of past losers. The third essay studies the determinants of ETF liquidations. Investors are subject to tax, trading, and search costs as a result of holding a liquidated fund. I find that fund size and flows are essential to a fund's survival. Larger fund families are also more likely to produce funds that will avoid liquidation. Funds that are latecomers to a trending category that subsequently underperforms are less likely to survive. Finally, I find that the average investor holding a fund with an upcoming liquidation is best served to immediately sell the liquidating fund and purchase other funds in the same category.