Local demand shocks, excess comovement and return predictability

Broman, Markus S.

doi:10.1016/j.jbankfin.2020.105910

Cited by 3 publications

(8 citation statements)

References 45 publications

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“…Bradley and Litan (2010) postulate that private firms question the decision to enter the capital market because investors who use ETFs can deteriorate price discovery through passive investment. Broman (2016) and Brown, Davies, and Ringgenberg (2016) affirm that ETFs attract short‐term and sentiment driven noise traders.…”

Section: Literature Overviewmentioning

confidence: 96%

Backtesting expected shortfall for world stock indexETFswith extreme value theory andGram–Charliermixtures

2020

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This paper analyses risk quantification for three main stock market index exchange‐traded funds in world financial markets. We compare the relative performance of a set of parametric and semi‐nonparametric models in terms of both value‐at‐risk and expected shortfall backtesting techniques. To this end, we explore the result of the jointly elicitability of these two risk measures. We provide a new mixture of Gram–Charlier distributions that have been used in this framework for the first time and derive a close formula for directly computing expected shortfall. This model is compared to the Gaussian (benchmark model), Student's t, generalized Pareto (a case of the extreme value theory) and mixtures of Gram–Charlier distributions. The results show that peaks‐over‐threshold (extreme value theory) and flexible Gram–Charlier approximations are suitable to quantify market risk and mitigate concerns about possible financial instabilities generated by misuse of exchange‐traded funds trading.

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Section: Literature Overviewmentioning

confidence: 96%

Backtesting expected shortfall for world stock indexETFswith extreme value theory andGram–Charliermixtures

2020

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“…Unlike trades in the United States, which are settled in one depository system (Depository Trust Company, a CSD), the transactions of different exchanges in China are settled in different depository systems. The structure of multiple cross‐settlements, similar to the situation in Europe (Broman, 2020), raises the risk of settlement failure; that is, the broker's back‐office system cannot transfer ETF shares or underlying assets between CSDs in time. Specifically, if the underlying assets and ETFs are traded on different exchanges, they are settled in separate depository systems.…”

Section: Institutional Details Of Chinese Etfsmentioning

confidence: 99%

“…We recognize that NAVs may be stale, where the price deviation can be artificial and does not reflect inefficiency (Broman, 2020; Petajisto, 2017). Following Petajisto (2017), we sidestep the issue of stale NAVs by using a peer‐group strategy.…”

Section: Data and Descriptive Statisticsmentioning

confidence: 99%

“…Deviations calculated using the difference between ETF closing price and NAV may be inaccurate because of stale ETF closing price or NAV, in which case the price deviation is artificial and biased (Broman, 2020; Petajisto, 2017). However, our sample includes only ETFs with underlying stocks that are A‐listed shares, which may alleviate some of the concerns about stale NAVs.…”

Section: Additional Testsmentioning

confidence: 99%

“…Although price deviations are generally small for equity ETFs in the United States, this may not be the case in emerging or other markets because of differences in market design and arbitrage restrictions. Broman (2020) indicates that mispricing in the European ETF market is several times higher compared to that in the US market because of the structure of multiple cross-listings and higher arbitrage costs imposed through settlement systems. 5 Given the paucity of studies on the price efficiency of ETFs in emerging markets such as China, we first document distinct characteristics of the Chinese ETF market and then analyze the potential factors that determine price inefficiencies of Chinese equity ETFs, including liquidity and relative liquidity, arbitrage environment and activity, and ownership structure.…”

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confidence: 99%

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The effect of liquidity and arbitrage on the price efficiency of Chinese ETFs

Fang

Jiang

2023

J of Financial Research

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We study the potential factors that determine the large and persistent price deviations in Chinese equity exchange‐traded funds (ETFs). Our results suggest that ETF liquidity and arbitrage activity are positively correlated with ETF price efficiency, and the relation is more pronounced with higher institutional ownership. We also evaluate the effect of two exogenous shocks in the Chinese market. Using a policy change that added market makers to ETFs on the Shenzhen Stock Exchange (SZSE) and Shanghai Stock Exchange (SSE), we find that market makers improve price efficiency and that the impact is stronger for ETFs with lower liquidity. We also exploit a change in trading rules on the SZSE and show that the relaxation of arbitrage restrictions improves price efficiency. Altogether, these findings provide evidence that lack of liquidity, due to the unique market structure and regulations of the Chinese market, contributes to price inefficiency of Chinese ETFs.

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Dimensions of national culture and R2 around the world

Fetherolf,

Lovelace

2023

Journal of Banking & Finance

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Local demand shocks, excess comovement and return predictability

Cited by 3 publications

References 45 publications

Backtesting expected shortfall for world stock indexETFswith extreme value theory andGram–Charliermixtures

Backtesting expected shortfall for world stock indexETFswith extreme value theory andGram–Charliermixtures

The effect of liquidity and arbitrage on the price efficiency of Chinese ETFs

Dimensions of national culture and R2 around the world

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