Reading Tomorrow's Newspaper: Predictability in ETF Returns

Journal of Index Investing, Forthcoming

23 Pages Posted: 29 Sep 2012 Last revised: 25 Feb 2013

See all articles by Jon A. Fulkerson

Jon A. Fulkerson

University of Dayton

Bradford D. Jordan

University of Kentucky - Gatton College of Business and Economics

Date Written: September 28, 2012

Abstract

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.

Keywords: ETFs, daily returns, NAV

JEL Classification: G12, G20

Suggested Citation

Fulkerson, Jon A. and Jordan, Bradford D., Reading Tomorrow's Newspaper: Predictability in ETF Returns (September 28, 2012). Journal of Index Investing, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2153790 or http://dx.doi.org/10.2139/ssrn.2153790

Jon A. Fulkerson (Contact Author)

University of Dayton ( email )

300 College Park
Dayton, OH 45469
United States

Bradford D. Jordan

University of Kentucky - Gatton College of Business and Economics ( email )

550 South Limestone
Lexington, KY 40506
United States
859-257-4887 (Phone)
859-257-9688 (Fax)

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