Arbitrage and Valuation in the Market for Standard and Poor's Depositary Receipts

Financial Management, Vol. 29, No. 3, Autumn 2000

Posted: 14 Jun 2001

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 examines pricing in the market for depositary receipts, securities designed to track the performance of a stock index that trade like shares of stock. Arbitrage costs are low because these assets have low fundamental risk, low transactions costs, and high dividend yields. We find that Standard and Poor's Depositary Receipts (SPDRs), or spiders, do not trade at economically significant discounts, unlike closed-end mutual fund shares. Although individual investors invest much more heavily in SPDRs than in S&P500 stock, investor sentiment is not an important determinant of the discount. The SPDRs redemption feature facilitates arbitrage so that sophisticated traders can take advantage of and eliminate mispricing. However, we also report a larger, economically significant discount for MidCap SPDRs. MidCap SPDRs are designed to track the performance of the S&P MidCap 400 index, an index of moderate capitalization firms, and are expected to have higher arbitrage costs. Finally, we find that SPDRs and MidCap SPDRs returns are not excessively volatile, also unlike closed-end funds.

JEL Classification: G1, G12, G14

Suggested Citation

Ackert, Lucy F. and Tian, Yisong Sam, Arbitrage and Valuation in the Market for Standard and Poor's Depositary Receipts. Financial Management, Vol. 29, No. 3, Autumn 2000. Available at SSRN: https://ssrn.com/abstract=267746

Lucy F. Ackert

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 (Contact Author)

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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