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Exchange-traded funds, persistence in tracking errors and information dissemination

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  • Shin, Sangheon
  • Soydemir, Gökçe
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    Abstract

    We estimate tracking errors from 26 exchange-traded funds (ETFs) utilizing three different methods and test their relative performance using Jensen's model. We find that tracking errors are significantly different from zero and display persistence. Based on Jensen's alpha, risk adjusted returns are significantly inferior to benchmark returns for all ETFs with two exceptions at conventional significance levels revealing that passive investment strategy does not outperform market returns. We then examine the degree to which frequently used factors such as expense ratio, dividends, exchange rate and spreads of trading prices may be underlying sources of tracking errors causing this underperformance. We find that the change in the exchange rate is a significant source of tracking errors. Our serial correlation test, runs test and panel regression analysis reveal that Asian markets display relatively greater persistence and therefore are less efficient in disseminating information and noisier in filtering the information contained in returns.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Multinational Financial Management.

    Volume (Year): 20 (2010)
    Issue (Month): 4-5 (December)
    Pages: 214-234

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    Handle: RePEc:eee:mulfin:v:20:y:2010:i:4-5:p:214-234

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    Web page: http://www.elsevier.com/locate/mulfin

    Related research

    Keywords: G12 G14 G15 Exchange-traded funds Tracking errors Persistence;

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    References

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    1. Delcoure, Natalya & Zhong, Maosen, 2007. "On the premiums of iShares," Journal of Empirical Finance, Elsevier, vol. 14(2), pages 168-195, March.
    2. Edwin J. Elton, 2002. "Spiders: Where Are the Bugs?," The Journal of Business, University of Chicago Press, vol. 75(3), pages 453-472, July.
    3. Yang, Ting & Lau, Sie Ting, 2005. "U.S. cross-listing and China's B-share discount," Journal of Multinational Financial Management, Elsevier, vol. 15(4-5), pages 334-353, October.
    4. Michael C. Jensen, 1968. "The Performance Of Mutual Funds In The Period 1945–1964," Journal of Finance, American Finance Association, vol. 23(2), pages 389-416, 05.
    5. James M. Poterba & John B. Shoven, 2002. "Exchange Traded Funds: A New Investment Option for Taxable Investors," NBER Working Papers 8781, National Bureau of Economic Research, Inc.
    6. Anita K. Pennathur & Natalya Delcoure & Dwight Anderson, 2002. "Diversification Benefits of iShares and Closed-End Country Funds," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 25(4), pages 541-557.
    7. Olienyk, John P. & Schwebach, Robert G. & Kenton Zumwalt, J., 1999. "WEBS, SPDRs, and country funds: an analysis of international cointegration," Journal of Multinational Financial Management, Elsevier, vol. 9(3-4), pages 217-232, November.
    8. Blume, Lawrence & Easley, David & O'Hara, Maureen, 1994. " Market Statistics and Technical Analysis: The Role of Volume," Journal of Finance, American Finance Association, vol. 49(1), pages 153-81, March.
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    Cited by:
    1. Herz, Christian & Neunert, Daniela & Will, Sebastian & Wolf, Niko J. & Zwick, Tobias, 2012. "Portfolioallokation: Einbezug verschiedener Assetklassen," Bayreuth Working Papers on Finance, Accounting and Taxation (FAcT-Papers) 2012-01, University of Bayreuth, Chair of Finance and Banking.
    2. Blitz, David & Huij, Joop, 2012. "Evaluating the performance of global emerging markets equity exchange-traded funds," Emerging Markets Review, Elsevier, vol. 13(2), pages 149-158.

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