IDEAS home Printed from https://ideas.repec.org/a/eee/glofin/v49y2021ics1044028321000521.html
   My bibliography  Save this article

Do pricing efficiencies in Indian equity ETF market impact its performance?

Author

Listed:
  • Goel, Garima
  • Ahluwalia, Eshan

Abstract

We examine the pricing efficiency of domestic exchange-traded funds (ETFs) in the Indian equity market where growth co-exists with operating inefficiencies. The ETFs, on average, outperform their fund benchmarks, but the magnitudes of the premium (discount) and tracking error are considerably higher for a synchronously traded market. Among the ETF categories based on fund benchmarks, thematic and broad market ETFs have higher tracking errors and discounts than strategy and sectoral ETFs. We find a nonsignificant negative relationship between discount and redemption units, implying that the creation/redemption process remains unaffected by the prevailing discount in the market. Despite low arbitrage constraints, market participants fail to curtail the prevailing tracking error and discount. This study highlights the operational constraints of arbitrageurs in the Indian ETF market.

Suggested Citation

  • Goel, Garima & Ahluwalia, Eshan, 2021. "Do pricing efficiencies in Indian equity ETF market impact its performance?," Global Finance Journal, Elsevier, vol. 49(C).
    • Handle: RePEc:eee:glofin:v:49:y:2021:i:c:s1044028321000521
    DOI: 10.1016/j.gfj.2021.100654
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1044028321000521
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.gfj.2021.100654?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Working Papers 111, Princeton University, Department of Economics, Center for Economic Policy Studies..
    2. James M. Poterba & John B. Shoven, 2002. "Exchange-Traded Funds: A New Investment Option for Taxable Investors," American Economic Review, American Economic Association, vol. 92(2), pages 422-427, May.
    3. Kent T. Saunders, 2018. "Analysis of International ETF Tracking Error in Country-Specific Funds," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 46(2), pages 151-160, June.
    4. Hilliard, Jitka, 2014. "Premiums and discounts in ETFs: An analysis of the arbitrage mechanism in domestic and international funds," Global Finance Journal, Elsevier, vol. 25(2), pages 90-107.
    5. Markus K. Brunnermeier & Stefan Nagel & Lasse H. Pedersen, 2009. "Carry Trades and Currency Crashes," NBER Chapters, in: NBER Macroeconomics Annual 2008, Volume 23, pages 313-347, National Bureau of Economic Research, Inc.
    6. Bae, Kyounghun & Kim, Daejin, 2020. "Liquidity risk and exchange-traded fund returns, variances, and tracking errors," Journal of Financial Economics, Elsevier, vol. 138(1), pages 222-253.
    7. repec:pri:cepsud:91malkiel is not listed on IDEAS
    8. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    9. Delcoure, Natalya & Zhong, Maosen, 2007. "On the premiums of iShares," Journal of Empirical Finance, Elsevier, vol. 14(2), pages 168-195, March.
    10. Shin, Sangheon & Soydemir, Gökçe, 2010. "Exchange-traded funds, persistence in tracking errors and information dissemination," Journal of Multinational Financial Management, Elsevier, vol. 20(4-5), pages 214-234, December.
    11. 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.
    12. Cao, Jie & Han, Bing, 2016. "Idiosyncratic risk, costly arbitrage, and the cross-section of stock returns," Journal of Banking & Finance, Elsevier, vol. 73(C), pages 1-15.
    13. Robert F. Stambaugh, 2014. "Investment Noise and Trends," NBER Working Papers 20072, National Bureau of Economic Research, Inc.
    14. Fahad Almudhaf, 2019. "Pricing efficiency of exchange traded funds tracking the Gulf Cooperation Countries," Afro-Asian Journal of Finance and Accounting, Inderscience Enterprises Ltd, vol. 9(2), pages 117-140.
    15. Brown, Gregory W. & Cliff, Michael T., 2004. "Investor sentiment and the near-term stock market," Journal of Empirical Finance, Elsevier, vol. 11(1), pages 1-27, January.
    16. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    17. Boehme, Rodney D. & Danielsen, Bartley R. & Kumar, Praveen & Sorescu, Sorin M., 2009. "Idiosyncratic risk and the cross-section of stock returns: Merton (1987) meets Miller (1977)," Journal of Financial Markets, Elsevier, vol. 12(3), pages 438-468, August.
    18. Edwin J. Elton & Martin J. Gruber & George Comer & Kai Li, 2005. "Spiders: Where Are the Bugs?," Springer Books, in: Elisabeth Hehn (ed.), Exchange Traded Funds, pages 37-59, Springer.
    19. Robert F. Stambaugh, 2014. "Presidential Address: Investment Noise and Trends," Journal of Finance, American Finance Association, vol. 69(4), pages 1415-1453, August.
    20. Elton, Edwin J & Gruber, Martin J & Blake, Christopher R, 1996. "The Persistence of Risk-Adjusted Mutual Fund Performance," The Journal of Business, University of Chicago Press, vol. 69(2), pages 133-157, April.
    21. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 59-82, Winter.
    22. Harper, Joel T. & Madura, Jeff & Schnusenberg, Oliver, 2006. "Performance comparison between exchange-traded funds and closed-end country funds," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 16(2), pages 104-122, April.
    23. Louis R. Piccotti, 2018. "ETF Premiums and Liquidity Segmentation," The Financial Review, Eastern Finance Association, vol. 53(1), pages 117-152, February.
    24. Harsh Purohit & Nidhi Choudhary & Parul Tyagi, 2014. "An Evaluation of Tracking Error on World Indices ETFs Traded in India," The IUP Journal of Applied Finance, IUP Publications, vol. 20(3), pages 41-52, July.
    25. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Working Papers 111, Princeton University, Department of Economics, Center for Economic Policy Studies..
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. L. Alamelu & Nisha Goyal, 2023. "Investment Performance and Tracking Efficiency of Indian Equity Exchange Traded Funds," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 30(1), pages 165-188, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Priya Malhotra & Pankaj Sinha, 2023. "Exchange-traded Funds in India Amid COVID-19 Crisis: An Empirical Analysis of the Performance," Metamorphosis: A Journal of Management Research, , vol. 22(1), pages 38-54, June.
    2. Paul Handro & Bogdan Dima, 2024. "Analyzing Financial Markets Efficiency: Insights from a Bibliometric and Content Review," Journal of Financial Studies, Institute of Financial Studies, vol. 16(9), pages 119-175, May.
    3. Jürgen Huber & Michael Kirchler, 2013. "Corporate campaign contributions and abnormal stock returns after presidential elections," Public Choice, Springer, vol. 156(1), pages 285-307, July.
    4. Chan, Wesley S. & Frankel, Richard & Kothari, S.P., 2004. "Testing behavioral finance theories using trends and consistency in financial performance," Journal of Accounting and Economics, Elsevier, vol. 38(1), pages 3-50, December.
    5. Kwangmin Jung & Donggyu Kim & Seunghyeon Yu, 2022. "Next generation models for portfolio risk management: An approach using financial big data," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 89(3), pages 765-787, September.
    6. Lean, Hooi Hooi & Ang, Wei Rong & Smyth, Russell, 2015. "Performance and performance persistence of socially responsible investment funds in Europe and North America," The North American Journal of Economics and Finance, Elsevier, vol. 34(C), pages 254-266.
    7. Anjum, Sohail & Qayyum, Unbreen & Qureshi, Madeeha Gohar, 2019. "Aggregate performance evaluation of US Equity Mutual Funds - Explaining the performance of Growth Funds vs. Value Funds," MPRA Paper 100043, University Library of Munich, Germany.
    8. Campos Dias de Sousa, Ricardo Emanuel & Howden, David, 2015. "The Efficient Market Conjecture," MPRA Paper 79792, University Library of Munich, Germany.
    9. Dobson, Peter, 2020. "ETFs tracking errors on global markets with consideration of regional diversity," MPRA Paper 103695, University Library of Munich, Germany.
    10. Chi-Wei Su & Xu-Yu Cai & Ran Tao, 2020. "Can Stock Investor Sentiment Be Contagious in China?," Sustainability, MDPI, vol. 12(4), pages 1-16, February.
    11. Christophe J. GODLEWSKI & Katarzyna BYRKA-KITA & Renata GOLA & Jacek CYPRYJANSKI, 2022. "Silence is not golden anymore? Social media activity and stock market valuation in Europe," Working Papers of LaRGE Research Center 2022-04, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    12. Hooi Hooi Lean & Fabio Pizzutilo, 2021. "Performances and risk of socially responsible investments across regions during crisis," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 3556-3568, July.
    13. González-Sánchez, Mariano, 2022. "Factorial asset pricing models using statistical anomalies," Research in International Business and Finance, Elsevier, vol. 60(C).
    14. Michael Heinrich Baumann, 2022. "Beating the market? A mathematical puzzle for market efficiency," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 45(1), pages 279-325, June.
    15. Dionysia Dionysiou, 2015. "Choosing Among Alternative Long-Run Event-Study Techniques," Journal of Economic Surveys, Wiley Blackwell, vol. 29(1), pages 158-198, February.
    16. David M. Ritzwoller & Joseph P. Romano, 2019. "Uncertainty in the Hot Hand Fallacy: Detecting Streaky Alternatives to Random Bernoulli Sequences," Papers 1908.01406, arXiv.org, revised Apr 2021.
    17. Stöckl, Thomas & Huber, Jürgen & Kirchler, Michael & Lindner, Florian, 2015. "Hot hand and gambler's fallacy in teams: Evidence from investment experiments," Journal of Economic Behavior & Organization, Elsevier, vol. 117(C), pages 327-339.
    18. Rompotis, Gerasimos G., 2011. "Testing weak-form efficiency of exchange traded funds market," MPRA Paper 36020, University Library of Munich, Germany.
    19. Shmilovici Armin & Ben-Gal Irad, 2012. "Predicting Stock Returns Using a Variable Order Markov Tree Model," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 16(5), pages 1-33, December.
    20. Qianwei Ying & Tahir Yousaf & Qurat ul Ain & Yasmeen Akhtar & Muhammad Shahid Rasheed, 2019. "Stock Investment and Excess Returns: A Critical Review in the Light of the Efficient Market Hypothesis," JRFM, MDPI, vol. 12(2), pages 1-22, June.

    More about this item

    Keywords

    Exchange-traded funds; Tracking error; Premium; Inefficiency; Arbitrage;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:glofin:v:49:y:2021:i:c:s1044028321000521. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620162 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.