The Nonlinear Price Dynamics of U.S. Equity ETFs

32 Pages Posted: 25 Mar 2015

See all articles by Gunduz Caginalp

Gunduz Caginalp

University of Pittsburgh - Department of Mathematics

Mark DeSantis

Chapman University - The George L. Argyros College of Business and Economics

Akin Sayrak

University of Pittsburgh

Date Written: November 27, 2013

Abstract

We investigate the price dynamics of large market-capitalization U.S. equity exchange-traded funds (ETFs) in order to uncover trader motivations and strategy. We show that prices of highly liquid ETFs can deviate significantly from their daily net asset values. By adjusting for changes in valuations, we report the impact of non-classical variables including price trend and volatility using data from 2008 to 2011. We find a cubic nonlinearity in the trend suggesting traders are aware not only of the underreaction of others, but also self-optimize by anticipating others' reactions, and sell when the uptrend is stronger than usual.

Keywords: Exchange-traded funds, momentum, volatility, nonlinear dynamics

JEL Classification: G02, G12, G14, G17

Suggested Citation

Caginalp, Gunduz and DeSantis, Mark and Sayrak, Akin, The Nonlinear Price Dynamics of U.S. Equity ETFs (November 27, 2013). Journal of Econometrics, Vol. 183, No. 2, 2014, Available at SSRN: https://ssrn.com/abstract=2584084

Gunduz Caginalp (Contact Author)

University of Pittsburgh - Department of Mathematics ( email )

507 Thackeray Hall
Pittsburgh, PA 15260
United States
412-624-8339 (Phone)
412-624-8397 (Fax)

Mark DeSantis

Chapman University - The George L. Argyros College of Business and Economics ( email )

1 University Drive
Orange, CA 92866
United States

Akin Sayrak

University of Pittsburgh ( email )

341 Mervis Hall
Katz School of Business
Pittsburgh, PA 15260
United States
412-512-5720 (Phone)
(412) 253-6005 (Fax)

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