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    Mispricing and trading profits in exchange-traded notes

    Diavatopoulos, D. and Geman, Hélyette and Thukral, Lovjit and Wright, C. (2014) Mispricing and trading profits in exchange-traded notes. Journal of Investing 23 (1), pp. 67-78. ISSN 1068-0896.

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    Abstract

    This article investigates whether a simple long–short weekly trading strategy based on mispricing among exchange-traded notes (ETNs) generates profits in excess of the S&P 500 Index over the sample period of June 6, 2006 to January 30, 2012. Ignoring transaction costs, liquidity, and short-selling constraints, the authors find the following: 1) Mispricing is prevalent among ETNs. They enter into 90 trades over our 295-week period using a mispricing threshold of 5% and requiring a minimum average daily volume of 20,000 shares. 2) Total returns to the authors’ strategy are significantly higher than the S&P 500, which had a total return of 3.70% over the same period. The strategy generated total returns ranging from 9% to 110% over a mispricing threshold range of 8% to 14%, depending on the study’s minimum daily trading volume requirements. 3) Nearly all the trades and all the profits from this strategy come from the short side of the portfolio. This is consistent with previous empirical work demonstrating that ETNs are more likely to be overpriced than under priced.

    Metadata

    Item Type: Article
    School: Birkbeck Schools and Departments > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Research Centre: Commodities Finance Centre
    Depositing User: Sarah Hall
    Date Deposited: 01 Apr 2014 16:31
    Last Modified: 07 Dec 2016 15:31
    URI: http://eprints.bbk.ac.uk/id/eprint/9505

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