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Rating:M* Calls ETF Premium Changes Predictable Not Rated 0.0 Email Routing List Email & Route  Print Print
Monday, February 11, 2013

M* Calls ETF Premium Changes Predictable

Reported by Tommy Fernandez

Morningstar research published today shows that changes to ETF premiums could be predicted with a good degree of accuracy. In particular, daily changes to ETF premiums show a strong relationship to contemporaneous and lagged movements in the equity market, equity market volatility, and equity market liquidity.

The report, which can be accessed here, outlines a new methodology for modeling ETF premiums and makes the following points:
  • Daily changes to ETF premiums can be predicted in advance with a good degree of accuracy using easily-obtained information.
  • A naive trading strategy can be constructed to take advantage of the predictability of ETF premiums to generate abnormal returns with an average annualized Carhart alpha of 7.22 percent per year, ignoring costs.
  • ETFs are highly efficient on average, but extremely inefficient at times. Being able to anticipate when inefficiencies in ETFs pricing will occur matters for trade execution.
  • ETF premiums tend to exhibit patterns that resemble those observed in the equity market, equity market volatility, and equity market liquidity.

  • For more on the research, go to the Morningstar report

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