Premium
Arbitrage, Liquidity, and the Valuation of Exchange Traded Funds
Author(s) -
Ackert Lucy F.,
Tian Yisong S.
Publication year - 2008
Publication title -
financial markets, institutions and instruments
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.386
H-Index - 23
eISSN - 1468-0416
pISSN - 0963-8008
DOI - 10.1111/j.1468-0416.2008.00144.x
Subject(s) - market liquidity , net asset value , business , arbitrage , global assets under management , monetary economics , valuation (finance) , financial economics , liquidity premium , financial system , economics , liquidity risk , institutional investor , finance , corporate governance
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.