Pricing Efficiency of Exchange Traded Funds Tracking the Gulf Cooperation Countries

Almudhaf, F. (2019) “Pricing efficiency of ETFs tracking GCC stock markets”, Afro-Asian Journal of Finance and Accounting, 9(2), 117-140.

Posted: 24 Aug 2020

See all articles by Fahad Almudhaf

Fahad Almudhaf

Department of Communication Disorders Sciences - Department of Finance and Financial Institutions

Date Written: 2019

Abstract

This paper analyses the pricing efficiency of exchange traded funds (ETFs) as measured by the level and persistence of the deviation between market prices and net asset value (NAV). Studying ETFs tracking the unexplored Gulf Cooperation Countries (GCC), we find that Saudi Arabia exhibits the largest dollar premium, of $0.41, on average. On the other hand, the UAE trades at an average discount of $0.06. In addition, deviations (premiums or discounts) persist for as long as four days in Kuwait, while they disappear after one day in Saudi Arabia and Qatar. These empirical findings show that ETFs do not fully replicate the performance of their respective underlying benchmarks. Pricing inefficiencies exist in ETFs with significant tracking errors. Moreover, there is a positive and significant relationship between returns and contemporaneous premiums, while returns and lagged premiums are negatively related. This casts doubt on the efficient market hypothesis. Using vector error correction model (VECM), we find evidence of significant price discovery in ETFs. Our results contribute to better understanding of ETFs tracking the performance of GCC markets.

Keywords: Pricing Efficiency, Tracking Error, Exchange Traded Funds, ETFs, Qatar Stock, UAE Stock, Saudi Arabia Stock, iShares

Suggested Citation

Almudhaf, Fahad, Pricing Efficiency of Exchange Traded Funds Tracking the Gulf Cooperation Countries (2019). Almudhaf, F. (2019) “Pricing efficiency of ETFs tracking GCC stock markets”, Afro-Asian Journal of Finance and Accounting, 9(2), 117-140. , Available at SSRN: https://ssrn.com/abstract=3655713

Fahad Almudhaf (Contact Author)

Department of Communication Disorders Sciences - Department of Finance and Financial Institutions ( email )

Kuwait

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