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Arbitrage and Valuation in the Market forStandard and Poor's Depository Receipts

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Author Info

  • Lucy F. Ackert
  • Yisong S. Tian

Abstract

This paper examines pricing in the market for depositary receipts, securities designed to track the performance of a stock index that trade like shares of stock. Arbitrage costs are low because these assets have low fundamental risk, low transactions costs, and high dividend yields. We find that Standard and Poor’s Depositary Receipts (SPDRs), or spiders, do not trade at economically significant discounts, unlike closed-end mutual fund shares. Although individual investors invest much more heavily in SPDRs than in S&P500 stock, investor sentiment is not an important determinant of the discount. The SPDRs redemption feature facilitates arbitrage so that sophisticated traders can take advantage of and eliminate mispricing. However, we also report a larger, economically significant discount for MidCap SPDRs. MidCap SPDRs are designed to track the performance of the S&P MidCap 400 index, an index of moderate capitalization firms, and are expected to have higher arbitrage costs. Finally, we find that SPDRs and MidCap SPDRs returns are not excessively volatile, also unlike closed-end funds.

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Bibliographic Info

Article provided by Financial Management Association in its journal Financial Management.

Volume (Year): 29 (2000)
Issue (Month): 3 (Fall)
Pages:

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Handle: RePEc:fma:fmanag:ackert00

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Cited by:
  1. Delcoure, Natalya & Zhong, Maosen, 2007. "On the premiums of iShares," Journal of Empirical Finance, Elsevier, Elsevier, vol. 14(2), pages 168-195, March.
  2. Carol Alexander & Andreza Barbosa, 2006. "Minimum Variance Hedging and Stock Index Market Efficiency," ICMA Centre Discussion Papers in Finance icma-dp2006-04, Henley Business School, Reading University, revised Sep 2006.
  3. Levy, Ariel & Lieberman, Offer, 2013. "Overreaction of country ETFs to US market returns: Intraday vs. daily horizons and the role of synchronized trading," Journal of Banking & Finance, Elsevier, vol. 37(5), pages 1412-1421.
  4. Laurent Deville, 2008. "Exchange Traded Funds: History, Trading and Research," Post-Print halshs-00162223, HAL.
  5. Richie, Nivine & Madura, Jeff, 2007. "Impact of the QQQ on liquidity and risk of the underlying stocks," The Quarterly Review of Economics and Finance, Elsevier, vol. 47(3), pages 411-421, July.
  6. Pontiff, Jeffrey, 2006. "Costly arbitrage and the myth of idiosyncratic risk," Journal of Accounting and Economics, Elsevier, vol. 42(1-2), pages 35-52, October.
  7. Alexander, C. & Barbosa, A., 2008. "Hedging index exchange traded funds," Journal of Banking & Finance, Elsevier, vol. 32(2), pages 326-337, February.
  8. Carol Alexander & Andreza Barbosa, 2005. "Is Minimum Variance Hedging Necessary for Equity Indices? A study of Hedging and Cross-Hedging Exchange Traded Funds," ICMA Centre Discussion Papers in Finance icma-dp2005-16, Henley Business School, Reading University.
  9. Quentin C. Chu & Mustafa Mesut Kayali, 2006. "Standard & Poor’S Depositary Receipts And The Market Quality Of S&P 500 Index Futures," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 6(3).
  10. Warren Bailey & Lin Zheng & Yinggang Zhou, 2012. "What Makes the VIX Tick?," Working Papers 222012, Hong Kong Institute for Monetary Research.
  11. Carol Alexander & Andreza Barbosa, 2005. "The Spider in the Hedge," ICMA Centre Discussion Papers in Finance icma-dp2005-05, Henley Business School, Reading University.
  12. Chelley-Steeley, Patricia & Park, Keebong, 2010. "The adverse selection component of exchange traded funds," International Review of Financial Analysis, Elsevier, vol. 19(1), pages 65-76, January.
  13. Marshall, Ben R. & Nguyen, Nhut H. & Visaltanachoti, Nuttawat, 2013. "ETF arbitrage: Intraday evidence," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3486-3498.
  14. Loviscek, Anthony & Tang, Hongfei & Xu, Xiaoqing Eleanor, 2014. "Do leveraged exchange-traded products deliver their stated multiples?," Journal of Banking & Finance, Elsevier, vol. 43(C), pages 29-47.

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