Gold Exchange Traded Fund : Price Discovery and Performance Analysis

Subject Areas : Financial engineering

mahdi  shaerattar ¹ (Department of Economics, Qazvin Branch, Islamic Azad University, Qazvin, iran)
akbar  mirzapourbabajan ² (Department of Economics, Qazvin Branch, Islamic Azad University, Qazvin, irann)

Received: 2019-10-22 Accepted : 2020-01-11 Published : 2020-09-22

Keywords: Gold Exchange Traded Funds (ETF), price discovery, Tracking Error, price deviation,

Abstract :

The paper aims to examine the price discovery process and the performance of Gold Exchange Traded Funds (ETF) in Iran Mercantile Exchange (IME) for the period 2017/06/10 – 2019/09/18.The study has employed Johansen cointegration and Johansen’s Vector Error Correction Model (VECM) for the price discovery analysis. The results show that the spot prices lead the Gold ETF price during the study period and ETF is only following the spot prices. Also Tracking Error analysis shows that, Gold ETF have neither outperformed nor underperformed the spot price. Price Deviation analysis indicates that Gold ETF is trading lower than the spot price of gold. The entire analysis reveals that although the price discovery takes place in the spot market, Gold ETF have performed as well as physical gold and the slight difference in price with that of Gold is only because of certain fees, which are applicable in the management of Gold ETF. Therefore, the expected price discovery for gold ETF in IME has not been realized.

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9) Chou R, Chun H. Decimalization, trading costs, and information transmission between ETFs and index futures. Journal of Futures Markets. 2006, 26: 131–151.
10) Chu Q, Hsieh W, Tse Y. Price discovery on the S&P 500 index markets: An analysis of spot index, index futures, and SPDRs. International Review of Financial Analysis. 1999, 8: 21–34.
11) DeFusco R, Ivanov S, Karels G. The exchange traded funds' pricing deviation — Analysis and forecasts. Journal of Economics and Finance. 2011, 35: 181–197.
12) Devvil L. Exchange Traded Funds: History, Trading, and Research. Handbook of Financial Engineering. 2008: 67-97 (Springer).
13) Fang Y, Sanger G. Index price discovery in the cash market. Available at SSRN: http://ssrn.com/abstract 2013.
14) Frino A, Gallagher D. Tracking S&P 500 index funds. Journal of Portfolio Management. 2001, 28:44–55.
15) Fung H, Liu Q, Tse Y. An analysis of the price linkages among the DJIA index, futures, and exchange-traded fund markets. The Review of Futures Markets. 2008, 16. 301–328.
16) Hasbrouck J. Intraday price formation in U.S. equity index markets. Journal of Finance. 2003, 58: 2375-99.
17) Hasbrouck J. One security, many markets: determining the contributions to price discovery. Journal of Finance. 1995, 50:1175–1199.
18) Ivanov S, Jones F, Janis Z. Analysis of DJIA, S&P 500, S&P 400, NASDAQ 100 and Russell 2000 ETFs and their influence on price discovery. Global Finance Journal. 2013, 24: 171-187.
19) Ivanov S. The influence of ETFs on the price discovery of gold, silver and oil. Journal of Economics and Finance. 2013, 37: 453-462.
20) Kumar U, Tse Y. Single-stock futures: Evidence from the Indian securities market. Global Finance Journal. 2009, 20: 220–234.
21) Lau M, et al. Return spillovers between white precious metal ETFs: Pricing Efficiency & Performance of Exchange Traded Funds in India. Journal of Applied Finance. 2017, 21(3). https://ssrn.com/abstract=2671810
22) Mallika M, Sulphey M. Gold Exchange Traded Fund - Price Discovery and Performance Analysis. Scientific Annals of Economics and Business. 2018, 65 (4): 195-477.
23) O'Connell R. Gold exchange traded funds: their evolution and their role. Inst Invest. 2007,41:129–135.
24) Purohit H, Malhotra N. Pricing Efficiency & Performance of Exchange Traded Funds in India. The IUP Journal of Applied Finance, 2015, 21(3). https://ssrn.com/abstract=2671810.
25) Saleem M, Khan M. The overview of gold ETFs and it's various positive featues. International Journal of Marketing, Financial Services & Management Research. 2013, Vol2: 125-135.
26) Tse Y, Bandyopadhyay P, Shen Y. Intraday price discovery in the DJIA index markets. Journal of Business Finance & Accounting. 2006, 33. 1572–1585.
27) Tse Y, Martinez V. Price discovery and informational efficiency of international iShares funds. Global Finance Journal. 2007, 18: 1–15.
28) Tse Y, Xiang J. Market quality and price discovery: Introduction of the E-mini energy futures. Global Finance Journal. 2005, 16: 164–179.