Pricing Efficiency and Performance of Exchange Traded Funds in India

The IUP Journal of Applied Finance, Vol. 21, No. 3, July 2015, pp. 16-35

Posted: 18 Nov 2015

See all articles by Nidhi Malhotra

Nidhi Malhotra

Banarsidas Chandiwala Institute of Professional Studies

Harsh Purohit

Banasthali Vidyapith

Date Written: November 16, 2015

Abstract

Exchange Traded Funds (ETFs) are a remarkable example of financial innovation that provides the investors with unique inherent feature of a mutual fund and an ordinary corporate stock. The present study is motivated by the need to examine the performance, index tracking capabilities and pricing efficiency of ETFs. The purpose of the study is to address three objectives: (i) do the ETFs fully replicate the returns of the underlying benchmark; (ii) is there any pricing deviation between trading price and NAV of the respective ETFs studied; and (iii) the magnitude and persistence of premium/discounts in the market. The results of regression show that selected Indian ETFs do not follow full replication strategies and beta estimates deviate from unity with statistically insignificant alpha. Due to imperfect tracking ability of ETFs, there is presence of tracking error with significant magnitude. The difference between market price and NAV of ETF reveals the presence of discount (excess of NAV over market price) and pricing inefficiencies. The premium/discount persists in the market for an average period of three days but exceptional persistence of five days was observed for two ETFs.

Suggested Citation

Malhotra, Nidhi and Purohit, Harsh, Pricing Efficiency and Performance of Exchange Traded Funds in India (November 16, 2015). The IUP Journal of Applied Finance, Vol. 21, No. 3, July 2015, pp. 16-35, Available at SSRN: https://ssrn.com/abstract=2691840

Nidhi Malhotra (Contact Author)

Banarsidas Chandiwala Institute of Professional Studies ( email )

Sector-11, Dwarka
New Delhi, 110033
India

Harsh Purohit

Banasthali Vidyapith ( email )

Banasthali Vidyapith
P.O. Banasthali Vidyapith
Rajasthan, Rajasthan 304022
India
9887886320 (Phone)

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