This paper describes our work pricing options in the binomial model on leveraged exchange traded funds (ETFs) with three different approaches. A leveraged exchange traded fund attempts to achieve a similar daily return as the index it follows but at a specified positive or negative multiple of the return of the index. We price options on these funds using the leveraged multiple, predetermined by the leveraged ETF, of the volatility of the index. The initial approach is a basic time step approach followed by the standard Cox, Ross, and Rubinstein method. The final approach follows a different format which we will call the Trigeorgis pricing model. We demonstrate the difficulties in pricing these options based off the dynamics of the indices the ETFs follow.

This thesis makes new observations of market phenomena for various commodities and trading strategies centered around these observations. In particular, our results imply that many aspects of the commodities markets, from delivery markets to producers and consumer derivative based ETFs can be modeled eectively using nancial engineering techniques. Chapter 2 examines what drives the returns of gold miner stocks and ETFs. Inspired by our real options model, we construct a method to dynamically replicate gold miner stocks using two factors: a spot gold ETF and a market equity portfolio. We find that our real options approach can explain a significant portion of the drivers of firm implied gold leverage. Chapter 3 studies commodity exchange-traded funds (ETFs). From empirical data, we find that many commodity leveraged ETFs underperform significantly against our constructed dynamic benchmark, and we quantify such a discrepancy via the novel idea of realized effective fee. Finally, we consider a number of trading strategies and examine their performance by backtesting with historical price data. Chapter 4 studies the phenomenon of non-convergence between futures and spot prices in the grains market. In our proposed approach, we incorporate stochastic spot price and storage cost, and solve an optimal double stopping problem to understand shipping certificate prices. Our new models for stochastic storage rates explain the spot-futures premium.

The last decade has witnessed a dramatic growth in passive investing via exchange-traded funds (ETFs). To the extent that the demand for stocks via ETF flows is not related to firm-specific fundamental values, large ETF flows may push the price of the underlying stocks away from their fundamentals-based value. In this study I provide evidence consistent with this conjecture. In particular, I first document a positive association between ETF flows and the price-to-fundamentals relation of underlying stocks. Then, by using BlackRock’s expansion into the ETF business as an exogenous shock, I provide evidence that the association is likely to be causal rather than reflect some form of endogeneity (i.e., ETFs selecting certain stocks). Also, I find that high-flow firms subsequently underperform low-flow firms in operating and stock performance, consistent with the misvaluation being caused by non-fundamental demand shocks. Cross-sectional tests suggest that the ETF-related misvaluation is stronger for stocks with: a less competitive equity market (i.e., with prices more sensitive to demand shocks), lower ownership by active investors, and more costly arbitrage constraints. Finally, I find that high-flow firms exhibit behavior typically associated with perceived overvaluation (e.g., more secondary equity offerings).

<p>Utifrån en historisk jämförelse av de tre äldsta svenska ETFerna undersöker vi huruvida svensknoterade ETFer är en bättre placeringsstrategi än aktivt förvaltade Sverigefonder. Studien genomförs med de fyra utvärderingsmåtten Sharpe Ratio, Treynor Ratio, Jensen’s alfa samt Information Ratio för att se om ETFer ger högre riskjusterad avkastning än jämförbara aktivt förvaltade Sverigefonder. De tre ETFerna, XACT OMXS30, XACT OMXSB och XACT OMXSBULL jämförs mot samtliga aktivt förvaltade Sverigefonder som har som strategi att investera i stora bolag listade på Stockholmsbörsen. Samtliga utvärderingsmått ger tvetydiga resultat men två av de undersökta ETFerna visar sig ha genererat högre riskjusterad överavkastning än de jämförda fonderna. ETFernas överavkastning kan inte statistiskt säkerställas och bör därför tolkas med försiktighet. Vår undersökning indikerar dock att det kan vara mer fördelaktigt för privata investerare som värdesätter hög likviditet och aktierelaterade egenskaper att investera i ETFer framför aktivt förvaltade fonder.</p>

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Background: Ever since Sharpe, Treynor and Jensen advanced the methods of fund performance evaluation in the 60’s it has been a popular field of study in academia. As the intricacies of fund performance was untangled it became clear that paying for active management doesn’t yield higher cost adjusted returns. An Index investment strategy is the most sensible approach and it’s the associated cost which separate index vehicles. Exchange traded funds have risen as a competitor to the conventional index mutual fund but the research evaluating these is very scarce. The research conducted comparing the costs of the two vehicles do not take into account implicit transaction costs that in turn depend on specific market microstructure designs and could affect the cost relationship. The problem: Do liquidity and market structural disparities between markets affect the cost relationship between exchange traded funds and index mutual funds, through the implicit transaction cost? Objective of the research: The objective of this paper is to examine whether structural differences between markets affect implicit transaction costs to the extent that the cost relationship between index funds and exchange traded funds differ from earlier findings. Method: The need to generalize the findings prompted a quantitative approach to the research. Comparative examination will be done on the microstructure and liquidity of two different markets. The transaction costs will then be measured with statistical means and incorporated in a cost comparison model. Result and conclusion: There are architectural and liquidity differences between the two sample markets allowing for systematic differences in transaction cost, which were found but were not a significant contributor to the tracking error cost of the index mutual funds. The Swedish ETF do not get more profitable as the investment sum increases. A finding which contradicts earlier findings and is likely a consequence of the Swedish tax-laws for capital gains as well as the higher levels of management fees for ETFs. ETFs might still be a worthwhile investment since they possess unique qualitative benefits.

Utifrån en historisk jämförelse av de tre äldsta svenska ETFerna undersöker vi huruvida svensknoterade ETFer är en bättre placeringsstrategi än aktivt förvaltade Sverigefonder. Studien genomförs med de fyra utvärderingsmåtten Sharpe Ratio, Treynor Ratio, Jensen’s alfa samt Information Ratio för att se om ETFer ger högre riskjusterad avkastning än jämförbara aktivt förvaltade Sverigefonder. De tre ETFerna, XACT OMXS30, XACT OMXSB och XACT OMXSBULL jämförs mot samtliga aktivt förvaltade Sverigefonder som har som strategi att investera i stora bolag listade på Stockholmsbörsen. Samtliga utvärderingsmått ger tvetydiga resultat men två av de undersökta ETFerna visar sig ha genererat högre riskjusterad överavkastning än de jämförda fonderna. ETFernas överavkastning kan inte statistiskt säkerställas och bör därför tolkas med försiktighet. Vår undersökning indikerar dock att det kan vara mer fördelaktigt för privata investerare som värdesätter hög likviditet och aktierelaterade egenskaper att investera i ETFer framför aktivt förvaltade fonder.

Class of 2011 Abstract / OBJECTIVES: To assess the risk and return of publicly traded health insurance companies from 1986 through 2010. METHODS: Risk and return was assessed on these companies by identifying them with SIC 6231 and 6234 (Accident and Health Insurance and Medical Service Plans) along with their presence on the CRSP database. Risk and return was analyzed via alpha and beta for SIC 632x, which were calculated utilizing the CAPM, Fama-French 3 Factor and Carhart 4 Factor econometric models. Risk and return was further assessed by calculating a Sharpe ratio along with determining annualized mean excess return and volatility for SIC 632x and the overall market. Lastly, cumulative price paths for both SIC 632x and the overall market were calculated and a Monte Carlo simulation analysis in Matlab and Microsoft Excel was run to simulate 6500 portfolios to compare risk to return ratios for SIC 632x over the time period of 1986-2010 versus the time period of 2006-2010. RESULTS: Overall, 110 companies were identified with SIC 6321 and 6234 and 7938 observations were made. The results were reported in a cross sectional format with five time periods of five years each (1986-1990, 1991-1995, 1996-2000, 2001-2005, and 2006-2010 respectively). The descriptive statistics showed that SIC 632x had a higher rate of return than the overall market (1.21±14.15 compared to 0.88±4.49; however, they also had greater risk (0.89±14.15 vs 0.57±4.48). The CAPM model captured an overall alpha value of 0.44 while the 3 Factor model provided an overall alpha of -0.20 and the 4 Factor model provided an overall alpha of 0.31. The 4 Factor model had the highest overall r-squared value of 0.16. The overall annualized mean excess return was greater for SIC 632x than the overall market (10.71% vs 6.80%) while the volatility was also greater (20.30% vs 16.17%). Additionally, the Sharpe ratio was calculated and was greater overall for SIC 632x than the overall market (0.53 vs 0.42). Graphically, cumulative asset price paths were illustrated for both SIC 632x and market-based portfolios along with a mean variance efficient frontier for the SIC 623x portfolio set during the time periods of 1986-2010 and 2006-2010. These figures showed increased return for SIC 632x compared to the overall market while illustrating increasing risk and return rate trends for SIC 632x within the sector itself. CONCLUSION: Publicly traded companies providing accident and health insurance and medical service plans possess securities that have potentially higher returns but potentially higher risk relative to the overall market. Furthermore, the findings via the alpha, Sharpe ratio and Efficient Frontier simulation illustrated that the overall market provides a similar risk to return ratio compared to that of the analyzed companies in this study.

Exchange traded funds (ETFs) have increased significantly in popularity since they were first introduced in 1993. However, there is still much that is unknown about ETFs in the extant literature. This dissertation attempts to fill gaps in the ETF literature by using three related essays. In these three essays, we compare ETFs to closed ended mutual funds (CEFs) by decomposing the bid-ask spread into its three components; we look at the intraday shape of ETFs and compare it to the intraday shape of equities as well as examine the co-integration factor between ETFs on the London Stock Exchange and the New York Stock Exchange; we also examine the differences between leveraged ETFs and unleveraged ETFs by analyzing the impact of liquidity and volatility. These three essays are presented in Chapters 1, 2, and 3, respectively. Chapter one uses the Huang and Stoll (1997) model to decompose the bid-ask spread in CEFs and ETFs for two distinct periods—a normal and a volatile period. We show a higher adverse selection component for CEFs than for ETFs without regard to volatility. However, both ETFs and CEFs increased in magnitude of the adverse selection component in the period of high volatility. Chapter two uses a mix of the Werner and Kleidon (1993) and the Hupperets and Menkveld (2002) methods to get the intraday shape of ETFs and analyze co-integration between London and New York trading. We find two different shapes for New York and London ETFs. There also appears to be evidence of co-integration in the overlapping two-hour trading period but not over the entire trading day for the two locations. The third chapter discusses the new class of ETFs called leveraged ETFs. We examine the liquidity and depth differences between unleveraged and leveraged ETFs at the aggregate level and when the leveraged ETFs are classified by the leveraged multiples of -3, -2, -1, 2, and 3, both for a normal and a volatile period. We find distinct differences between leveraged and unleveraged ETFs at the aggregate level, with leveraged ETFs having larger spreads than unleveraged ETFs. Furthermore, while both leveraged and unleveraged ETFs have larger spreads in high volatility, for the leveraged ETFs the change in magnitude is significantly larger than for the unleveraged ETFs. Among the multiples, the -2 leveraged ETF is the most pronounced in its liquidity characteristics, more so in volatile times.

Since the end of October 2010, the Bank of Japan has been pursuing a new Asset Purchase Programme, which includes, among other things, direct intervention in the domestic stock market through the purchase of exchange-traded funds. This research study evaluated the impact of the Bank of Japan’s exchange-traded fund purchase programme on market returns using an event study methodology. An investigation into a sample of 33 intervention events in the Nikkei 400 exchangetraded fund and 303 intervention events in the Nikkei 225 exchange-traded fund, found that the average abnormal one-day return is -1.36% for the Nikkei 400 exchange-traded fund and -1.39% for the Nikkei 225 exchange-traded fund, while the average abnormal five-day return is -0.63% and -1.11% for each exchange-traded fund respectively. Due to the high volatility, statistically the returns are indistinguishable from zero. However, this study presents evidence that the Bank of Japan intervenes predominantly during large decreases in the market. Hence, there is suggestive evidence that the Bank of Japan’s policy is effective at reducing market losses, but is not extensive enough to significantly increase returns.