Impact Of Etfs Trading On Underlying Securities

Capital markets provide a function which facilitates the buying and selling of long-term financial securities to increase liquidity and their value, Watson & Head (2013). Hence, the Efficient Market Hypothesis (EMH) explains the relationship that exists with the prices of the capital market securities, where no individual can beat the market by regularly buying securities at a lower price than it should be. This means that in order to be an efficient market prices of securities will have to fairly and fully reflect all available information, Fama (1970). Consequently, Watson & Head (2013) believe that market efficiency refers to the speed and quality of how share price adjusts to new information. Nevertheless, the testing of the efficient markets has led to the recognition of three different forms of efficiency in which explains how information available is used within the market. In this essay, the EMH will be analysed; testing of EMH will show that the model does provide strong evidence to explain share behaviour but also anomalies will be discussed that refutes the EMH. Therefore, a judgment will be made to see which structure explains the efficient market and whether there are some implications with the EMH, as a whole.

The extracted data used includes monthly returns from January 1972 to July 2011. The assets are selected so that the portfolio contains the largest, most liquid, and most tradable assets. The choice of such a variety of assets across several markets was used in order to generate a large cross sectional dispersion in average return. It helped to reveal new factor exposure and define a general framework of the correlated value and momentum effects in various asset classes.

Advisors and investors would do well to pay as much attention to the expected volatility of any portfolio or investment as they do to anticipated returns. Moreover, all things being equal, a new investment should only be added to a portfolio when it either reduces the expected risk for a targeted level of returns, or when it boosts expected portfolio returns without adding additional risk, as measured by the expected standard deviation of those returns. Lesson 2: Don’t assume bonds or international stocks offer adequate portfolio diversification. As the world’s financial markets become more closely correlated, bonds and foreign stocks may not provide adequate portfolio diversification. Instead, advisors may want to recommend that suitable investors add modest exposure to nontraditional investments such as hedge funds, private equity and real assets. Such exposure may bolster portfolio returns, while reducing overall risk, depending on how it is structured. Lesson 3: Be disciplined in adhering to asset allocation targets. The long-term benefits of portfolio diversification will only be realized if investors are disciplined in adhering to asset allocation guidelines. For this reason, it is recommended that advisors regularly revisit portfolio allocations and rebalance

“The Benefits of diversification are clear. Portfolio theory has played a crucial role in explaining the relationship between risk and return where more than one investment is held. It also enables us to identify optimal and efficient portfolios.”

The five events are correlated and occurring over approximate five months from 18th August 2010 to 13th December 2010.

Investors tend to use triple-leveraged ETF to obtain triple the return yield of the investments. However, they are discouraged to invest on triple-leveraged ETF as the disadvantages overwhelm the advantages. One of the advantages of triple-leveraged ETF is that it gives three times the return whereas one of the disadvantages of triple-leveraged ETF is that it could lose triple of the tracked index. According to Cummans (2015), ‘The additional risks come in the form of counterparty risk, liquidity risk, and increased correlation risk’. Thus, ETF has higher risk as it may lose three times the return and increases bankruptcy rate. Result shows that the annual return to the triple-leveraged ETF is expected to be triple the annual return to the S&P 500 index, it is only applicable to theory where everything is in constant. In reality the tracked index fluctuating frequently, it will not be three times of the

This document is authorized for use only by Yen Ting Chen in FInancial Markets and Institutions taught by Nawal Ahmed Boston University from September 2014 to December 2014.

This accessibility of information and deregulation has encouraged foreign investments, and we can see the surge of new financial products and an increase in financial innovation in the markets today. Stocks can now be dual-listed, traded across markets in two different countries. For example, many large Canadian companies are listed both on the New York Stock Exchange as well as the Toronto Stock Exchange. There are also Brazilian-based companies listed on both the Brazilian and US stock markets. This adds greater liquidity to the companies’ shares traded, and also gives investors more options as to where they can trade.

In addition, table 1 details the results of the model “∆Quoted spread or ∆Effective spread = β0 + β1 ∆(TACC/TA) + β2 ∆(1/Price) + β3 ∆Return volatility + β4 ∆Log(Dollar trading volume) + β5 ∆Log(Market value of equity) + ε” created by the same researchers who formed table 2. The effective spread is the average effective percentage spread at time t while quoted spread is the average quoted spread at time t. The change is calculated from subtracting pre-SOX averages from post-SOX averages. Data was sampled from 588 firms over three years (from January 1, 2001 to December 31, 2004). The main significant variable is the change in volatility. This variable shows a statistically significant change at the 1% level. After the passage of SOX, market

We have used the data from Jan.2007-Dec.2011 (60 data points) to re-estimate βi’s which were averaged across securities within portfolios in order to obtain 10 initial portfolio βpt using the following regression

The idea of institutional herding has a striking implication for security price volatility. Estimations from the essay ‘Sending the Herd Off the Cliff Edge’suggests that the predominance of herding behavior may explain why the financial system in 1990s had been in crisis for 40 out of the 120 months or 33% of the time (Persaud, 2000). These concerns, along with the increasing stock market ownership of institution investor in comparison to individual investors, is often used as a basis for advocating for an increase in monitoring institutional trading in equity markets in hopes that it that would lead to a reduction in the dominance of institutional investors in the financial market. However such claims are not fully supported by empirical research in the literature. Two schools of thoughts emerge the first being that herding enhances pricing efficiency, and second ascertains that herding initiates short-term trend reversals.

Institutions often trade of shares and institutional order’s can have a major impact on market volatility. In smaller markets, institutional trades can potentially destabilize the markets. Moreover, institutions also have to design and time their trading strategies carefully so that their trades have maximum possible

Diversification is a method of investing that been shown to increase portfolio return while reducing portfolio risk as measured by standard deviation. This method specifically increases the efficient frontier for investors. The challenge to an investing firm is an appetite by its customers for an ever increasing efficient frontier. One area to explore to obtain this increase is through further diversifying through international diversification.

Exchange Traded Funds (ETFs), similar in many ways to mutual funds, are investment funds traded on stock exchanges. ETFs track the performance of commodities, bonds, and large indices such as the S&P 500 (SPX), NASDAQ (IXIC), Dow Jones (DJI), etc. Much like stocks, ETFs experience price changes throughout the trading day in which they are bought and sold. Fundamentally, the prices of assets traded remain close to, but not always equal, to its net asset value. Largely attractive due to lower costs, flexibility, minimal capital gains taxes, and leverage for market exposure, ETFs have become popular amongst investors. With a recent influx of ETF investments, the risks associated can have severe ramifications to the individual investor and financial markets. To mitigate these risks, ETFs can have options written against them as a hedging strategy for speculative investors.

Among the most fundamental risks, associated with exchange-traded derivatives, is variable degree of risk. According to Ernst, Koziol, & Schweizer (2011), the transactions in