High‐frequency analysis of exchange traded funds' pricing deviation

Abstract

PurposeThe purpose of this study is to extend the work of DeFusco, Ivanov and Karels by examining pricing deviation of DIA, SPY and QQQQ on intradaily basis.Design/methodology/approachThe DIA is designed to be one hundredth of the DJIA, the SPY is designed to be one tenth of the S&P 500 and QQQQ is designed to be one fortieth of the NASDAQ 100. This feature of ETFs requires the estimation of the difference between the proportional level of the index and the price of the ETF, which is the ETF pricing deviation.FindingsThe paper finds that the DIA, SPY and QQQQ pricing deviations are 0.0429, −0.0743 and 0.4298, respectively. The findings indicate that the prices of DIA and QQQQ are on average lower than the underlying indexes. SPY is the exception having a price which is higher than the theoretical price of the S&P 500 index. The author finds that this is due to the increased demand for the SPY. Additionally, the paper provides an explanation for the large change (increase) in the pricing deviation of QQQQ after December 1, 2004 which DeFusco, Ivanov and Karels could not explain. On December 1, 2004 QQQQ trading was consolidated on NASDAQ. The paper finds negative growth in the volume of QQQQ after December 1, 2004 indicating decrease in popularity of this ETF. The decrease in popularity of QQQQ might explain the increase in its pricing deviation.Research limitations/implicationsThe paper uses high frequency data in the analysis of pricing deviation which might be artificially deflating standard errors and thus inflating the t‐test significance values.Originality/valueThe paper contributes to the ongoing search in the finance literature of precision ETF performance metrics.

Analysis of the QQQ spot and option volatility behaviour around the QQQ move from AMEX to NASDAQ

“…This paper extends the work of Ivanov (2014), Broom et al (2007), DeFusco et al (2011), Ivanov (2013, Bakshi et al (2003), Buraschi and Jackwerth (2001), Lakonishok et al (2004), Eraker et al (2003) and Wagner and Szimayer (2004). Ivanov (2014) examines the speculation-hedging relation in QQQ option markets around the QQQ move from AMEX to NASDAQ because there were improvements in its market trading efficiency after the move, as documented by Broom et al (2007).…”

“…Studies by Eraker et al (2003) and Wagner and Szimayer (2004), among others, document that option implied volatilities change due to spot volatility jumps as the result of a specific underlying asset event, such as exchange move, which is in support of the Bakshi et al (2003) ideas. DeFusco et al (2011) and Ivanov (2013) study pricing deviation of the three most popular ETFs, one of which is QQQ. DeFusco et al study pricing deviation on daily basis by first defining it as the difference between the price of the underlying index and the price of the tracking ETF.…”

“…They document changes in QQQ pricing deviation around the time of the QQQ move. Ivanov (2013) studies pricing deviation on intra-daily basis and suggests that the increase in the pricing deviation of QQQ might be a result of the decrease in popularity of this ETF. He supports his conjecture by documenting a negative volume growth between 1 December 2004 and the end of the observation period of QQQ, which DIA and SPY did not experience.…”

“…DeFusco et al stop short of explaining why this sharp increase in pricing deviation occurs. Ivanov (2013) suggests that the increase in the pricing deviation of QQQ might be a result of the decrease in the popularity of QQQ at that time. This event provides us with an excellent laboratory to examine ETF spot and option volatilities.…”

Essays on Financial Innovations: Feedback Trading, Tracking Efficiency and Innovation Index

“…The authors found by examining a sample of three leveraged ETFs in the Canadian market that these assets were generally traded by retail investors that hold their position for a noticeably short period, and that the deviations between ETF stock prices and its NAVs are small on average, but prone to increase. Ivanov (2013) expanded on the work by DeFusco, Ivanov and Karels (2011), and examined ultrahigh-frequency (one-minute intervals) price data from three major ETFs in the U.S market (DIA, SPY and QQQQ). The author found evidence of negative price deviation (discount) in the DIA and QQQQ prices in compared to the NAV, and of positive price deviation (premium) of SPY prices compared to the NAV of underlying assets, therefore, indicating arbitrage opportunities in the market.…”