Authors: Fahad Almudhaf
Addresses: Department of Finance and Financial Institutions, Kuwait University, P.O. Box 5486, Safat, 13055 Kuwait
Abstract: This paper analyses the pricing efficiency of exchange traded funds (ETFs) as measured by the level and persistence of the deviation between market prices and net asset value (NAV). Studying ETFs tracking the unexplored Gulf Cooperation Countries (GCC), we find that Saudi Arabia exhibits the largest dollar premium, of $0.41, on average. On the other hand, the UAE trades at an average discount of $0.06. In addition, deviations (premiums or discounts) persist for as long as four days in Kuwait, while they disappear after one day in Saudi Arabia and Qatar. These empirical findings show that ETFs do not fully replicate the performance of their respective underlying benchmarks. Pricing inefficiencies exist in ETFs with significant tracking errors. Moreover, there is a positive and significant relationship between returns and contemporaneous premiums, while returns and lagged premiums are negatively related. This casts doubt on the efficient market hypothesis. Using vector error correction model (VECM), we find evidence of significant price discovery in ETFs. Our results contribute to better understanding of ETFs tracking the performance of GCC markets.
Keywords: pricing efficiency; tracking error; exchange traded funds; ETFs; Qatar stock; UAE stock; Saudi Arabia stock; iShares.
Afro-Asian Journal of Finance and Accounting, 2019 Vol.9 No.2, pp.117 - 140
Available online: 24 Apr 2019 *Full-text access for editors Access for subscribers Purchase this article Comment on this article