Reading Tomorrow's Newspaper: Predictability in ETF Returns
Jon A. Fulkerson
Loyola University Maryland - Sellinger School of Business & Management
Bradford D. Jordan
University of Kentucky - Gatton College of Business and Economics
September 28, 2012
Journal of Index Investing, Forthcoming
Abstract: We study the persistence of ETF premiums and discounts. Following a day of high or low premiums or discounts over NAV, ETFs tend to maintain a premium or discount for up to five days, though there is some regression to the mean. Premiums also predict distinct patterns of returns in the following day. Overnight returns following a premium have large drops in prices following a high premium, but significantly high returns the next day. Surprisingly, the NAV returns over the next day also tend to be positive. Discounts show a similar, but opposite pattern with smaller magnitudes. We conclude that ETF premiums and discounts have some ability to predict future returns, including the fundamental returns of the underlying assets.
Number of Pages in PDF File: 23
Keywords: ETFs, daily returns, NAV
JEL Classification: G12, G20Accepted Paper Series
Date posted: September 29, 2012 ; Last revised: February 25, 2013
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