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The exchange traded funds' pricing deviation: analysis and forecasts

Author: DeFusco Richard  

Publisher: Springer Publishing Company

ISSN: 1055-0925

Source: Journal of Economics and Finance, Vol.35, Iss.2, 2011-04, pp. : 181-197

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Abstract

In this paper, we study the pricing deviations of the three most liquid Exchange Traded Funds from the price of the underlying index. We examine Spider, Diamonds, and Cubes and find that their price deviation is predictable and nonzero. Therefore, the pricing deviation can be considered an additional cost of administering an Exchange Traded Fund. The reason for the predictability of the pricing deviation stems from its stationarity. The reasons for the pricing deviation being nonzero are the specific price discovery processes and dividend accumulation and distribution for this asset class. The pricing deviation can be used as a performance metric of Exchange Traded Funds and might motivate arbitrage strategies.