Mispricing and Trading Profits in ETNs

Posted: 16 Sep 2012 Last revised: 15 Jul 2015

Dean Diavatopoulos

Seattle University

Hélyette Geman

University of London - Economics, Mathematics and Statistics

Lovjit Thukral

Long Rock Capital

Colbrin Wright

Brigham Young University

Date Written: September 14, 2012

Abstract

We investigate whether a simple long-short weekly trading strategy based on mispricing among ETNs generates profits in excess of the S&P 500 over the sample period of June 6, 2006 to January 30, 2012. Ignoring transaction costs, liquidity, and short selling constraints we find the following. (1) mispricing is prevalent among ETN securities. We enter into 90 trades over our 295 week period using a mispricing threshold of 5% and requiring a minimum average daily volume of 20,000 shares. (2) Total returns to our strategy are significantly higher than the S&P 500, which had a total return of 3.70% over the same period. Our strategy generated total returns ranging from 9% to 110% over a mispricing threshold range of 8 to 14% depending on our minimum daily trading volume requirements. (3) Nearly all the trades and all the profits from our strategy come from the short side of our portfolio. This is consistent with previous empirical work demonstrating that ETNs are more likely to be overpriced than underpriced.

Keywords: exchange-traded notes, leveraged exchange-traded funds, tracking error, mispricing, ETNs, ETN, risk and performance, active management

JEL Classification: G10, G11, G12, G14

Suggested Citation

Diavatopoulos, Dean and Geman, Hélyette and Thukral, Lovjit and Wright, Colbrin, Mispricing and Trading Profits in ETNs (September 14, 2012). Journal of Investing, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2146748 or http://dx.doi.org/10.2139/ssrn.2146748

Dean Diavatopoulos

Seattle University ( email )

901 12th Avenue
Seattle, WA 98122
United States

Helyette Geman

University of London - Economics, Mathematics and Statistics ( email )

Malet Street
London, WC1E 7HX
United Kingdom

Lovjit Thukral (Contact Author)

Long Rock Capital ( email )

1 Cornhill
London, EC3V 3ND
United Kingdom

Colbrin Wright

Brigham Young University ( email )

United States
(801) 422 1224 (Phone)

Paper statistics

Abstract Views
3,302