Arbitrage, Liquidity, and the Valuation of Exchange Traded Funds

32 Pages Posted: 21 Nov 2008

See all articles by Lucy F. Ackert

Lucy F. Ackert

Kennesaw State University - Michael J. Coles College of Business

Yisong S. Tian

York University - Schulich School of Business

Abstract

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.

Suggested Citation

Ackert, Lucy F. and Tian, Yisong Sam, Arbitrage, Liquidity, and the Valuation of Exchange Traded Funds. Financial Markets, Institutions & Instruments, Vol. 17, Issue 5, pp. 331-362, December 2008. Available at SSRN: https://ssrn.com/abstract=1304353 or http://dx.doi.org/10.1111/j.1468-0416.2008.00144.x

Lucy F. Ackert (Contact Author)

Kennesaw State University - Michael J. Coles College of Business ( email )

1000 Chastain Road
Department of Economics and Finance
Kennesaw, GA 30144
United States
770-423-6111 (Phone)
770-499-3209 (Fax)

Yisong Sam Tian

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
416-736-2100, ext 77943 (Phone)
416-736-5687 (Fax)

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