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Article

Mispricing and Trading Profits in Exchange-Traded Notes

Dean Diavatopoulos, Hélyette Geman, Lovjit Thukral and Colby Wright
The Journal of Investing Spring 2014, 23 (1) 67-78; DOI: https://doi.org/10.3905/joi.2014.23.1.067
Dean Diavatopoulos
is an assistant professor of finance at Villanova University in Villanova, PA.
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  • For correspondence: dean.diavatopoulos@villanova.edu
Hélyette Geman
is director of the Commodity Finance Centre at Birkbeck, University of London, and ESCP Europe in London, UK.
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  • For correspondence: hgeman@hotmail.com
Lovjit Thukral
is a quantitative research analyst at Deutsche Bank AG, Filiale in London, UK.
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  • For correspondence: lovjit.thukral@db.com
Colby Wright
is an assistant professor of finance at Brigham Young University in Provo, UT.
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  • For correspondence: colby.wright@byu.edu
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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.

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The Journal of Investing: 23 (1)
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Mispricing and Trading Profits in Exchange-Traded Notes
Dean Diavatopoulos, Hélyette Geman, Lovjit Thukral, Colby Wright
The Journal of Investing Feb 2014, 23 (1) 67-78; DOI: 10.3905/joi.2014.23.1.067

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Mispricing and Trading Profits in Exchange-Traded Notes
Dean Diavatopoulos, Hélyette Geman, Lovjit Thukral, Colby Wright
The Journal of Investing Feb 2014, 23 (1) 67-78; DOI: 10.3905/joi.2014.23.1.067
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