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Title: Three essays on exchange traded funds
Author: Marí Clérigues, Maria del Carmen
ISNI:       0000 0004 7428 6742
Awarding Body: University of Liverpool
Current Institution: University of Liverpool
Date of Award: 2018
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This thesis studies different aspects of the Exchange Traded Funds' tracking performance. Chapter 1 introduces the topic and provides the motivation for each chapter. Chapter 2 relates the tracking ability of an Exchange Traded Fund to the optimal hedge ratio for a portfolio that is long one unit of the fund financed by a short position in the benchmark index. The sample employed contains a range of funds listed on the New York Stock Exchange that track fixed income and equity indices. Panel cointegration techniques are employed to estimate the long-run relationship between the funds and their benchmarks. Furthermore, a Monte-Carlo experiment is performed to illustrate the inefficiency of the tracking error estimates when cointegration is not allowed for. Tracking errors based on return matching regressions, which neglect the long run relationship between the fund and the benchmark, may yield misleading estimates of tracking performance and sub-optimal portfolio choices for investors. Chapter 3 investigates the determinants of the cross-sectional differences in tracking errors. We argue that specific proxies should be used to account for the special structure of the ETF. We distinguish between primary liquidity, which relates to the ETF's creation and redemption processes, and secondary liquidity, which is linked to the trading activity of ETFs, and construct a series of proxies that might explain the differences observed. The sample employed coincides with that of Chapter 2 in terms of funds but, due to data availability for the liquidity proxies, the time horizon in Chapter 3 is slightly shorter. The results attribute the differences in the cross-section of tracking errors to differences in liquidity arising from the creation-redemption processes in the primary market for ETFs, and to differences in the liquidity in the secondary markets. Chapter 4 focuses on the time series dimension of ETFs' tracking errors. We evaluate the tracking ability of the most traded ETF in world, SPY ETF, using the hedge ratio approach from Chapter 2. The model suggests that time variation in the optimal hedge ratio arises from two sources of new information; news about the ETF and news about the benchmark. Additionally, we allow the variance-covariance matrix to vary with time and for asymmetry in the response to shocks. Consequently, the hedge ratio and the key measures of ETF's performance may also display time variation and asymmetry. The results suggest that as news about the fund and the benchmark arrive to the market, the elements of the variance-covariance matrix respond causing the hedge ratio to vary accordingly. In the presence of asymmetry in response to news, the hedge ratio might also exhibit asymmetric response unless the quality of the tracking is extremely good. Chapter 5 provides the conclusions and the directions for future research.
Supervisor: Henry, Ólan T. ; Florackis, Chris Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral