Essays on etfs and futures in commodity space: Price discovery dynamics and the physical-versus-synthetic debate
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- Tez No: 608818
- Danışmanlar: PROF. DR. LAURENT DEVİLLE
- Tez Türü: Doktora
- Konular: İşletme, Business Administration
- Anahtar Kelimeler: Belirtilmemiş.
- Yıl: 2017
- Dil: İngilizce
- Üniversite: EDHEC Business School
- Enstitü: Yurtdışı Enstitü
- Ana Bilim Dalı: Belirtilmemiş.
- Bilim Dalı: Belirtilmemiş.
- Sayfa Sayısı: 221
Özet
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Özet (Çeviri)
Overall, Exchange Traded Funds (ETFs) have been one of the most important innovations of the past two decades in the financial industry. Within the exchange traded product space, one sub-domain that has witnessed extraordinary growth is that of the commodity ETFs. Historically, futures have been the main vehicles for investing in the commodity segment. Some retail investors have also sought exposure to commodities, particularly to precious metal commodities, through investing in mining companies. This interest in precious metal commodity class as a safe asset was once more apparent during Hurricane Harvey. In the last decade, the investment choices have increased with the arrival of ETFs. In addition to the arrivals of ETFs in the commodity space, there has been another product innovation, namely, mini-futures like gold mini futures, silver mini futures, and so forth. Mini-futures are small-sized futures contracts that represent a fraction of the value of standard futures. Their trading advantages include greater affordability and low margin rates. The entry of these vehicles in the commodity segment has meant new dynamics in terms of price formation. Put differently, the price formation and interaction dynamics have become more complex as the product range has become more complete. Given these developments, it is important to check whether standard futures survived innovation in terms of price leadership because this market hosts key institutional investors who tend to be better-informed than the rest. Due to its liquidity, investor composition and efficiency; futures have historically been the reference market for commodities. Put differently, it has been the market where prices move first. To this end, we checked whether there have been any changes in leadership in the context of the new extended product range. In line with the general ETF expansion and investor interests, at the end of 2013 the commodity ETF space had become a 100-billion-dollar business comprised of co-existing physical commodity ETFs and synthetic commodity ETFs. With a physical ETF, the ETF ii provider aims to track an index by buying its underlying assets in the same weights as in the index. Synthetic ETFs, on the other hand, allow replication of the index using derivatives such as futures or swaps. However, this successful expansion has not been without its controversies, one of the most salient being the physical-versus-synthetic debate. The thesis consists of two chapters. The main contribution of the first chapter is to provide a complete picture of price discovery process for precious metals, considering regular futures, mini-futures, and ETFs. This analysis allows us to verify whether regular futures have ceded their leadership roles to ETFs or to mini-futures. Additionally, the chapter studies the inter-segmental relationships across commodities. It also examines the relationship of prices of ETFs and futures and precious metal stocks. The results of these multi-faceted and comprehensive analyses indicate that regular futures remain the price leader ahead of mini-futures and ETFs in the precious metal world. It also identifies an across-the-board impact of gold and silver futures on other securities such as ETFs. The influence of futures is also observed on the returns of mining stocks such as Barrick Gold and Silver Wheaton. In terms of impacting other securities and leading price discoveries, futures remain more important than ETFs during the analysis period. Given this importance and influence, futures, the preferred vehicles for institutional investors, remain the benchmark security for comparative purposes in our analysis. Building on the premise of futures being the reference security, the second chapter tackles another relevant question using futures as a yardstick. As was already mentioned, the co-existence of physical and synthetic ETFs has been a source of controversy. In 2011, the debate regarding physical-versus-synthetic ETFs commanded the attention of global regulators. Although the debate began with the admirable intention of promoting investor protection, it soon took the form of a commercial battle between providers of physical and synthetic ETFs. Additionally, most academic research focused on counterparty risk and iii tracking error issues. Insufficient focus was given to aspects such as price formation, intraday volatility, or bid-ask spreads despite the fact that they have a direct impact on investors in the secondary market. The structural differences (emanating from differences in the Creation Redemption process) between ETF types raise questions on whether synthetic ETFs behave differently than physical ETFs in relation to futures in terms of price formation, intraday volatility, and bid-ask spreads. This part of the work therefore focuses on the secondary market and contributes to the literature with empirical comparisons using intraday data. In addition to studying the price discovery, it studies intraday volatility and bid-ask spreads. Since ETF market-makers mostly use futures for intraday hedging, we gain insight into market-making operations in the secondary market by examining the role of futures on different commodities. Furthermore, we also study the causal relationships across intraday volatilities and bid-ask spreads of different securities by employing Granger-causality. The study finds a dominance of futures over both physical and synthetic ETFs. This preeminence is particularly evident for synthetic ETFs, as synthetic ETFs invest in future contracts to offer exposure to commodities. Secondly, in terms of intraday volatility, we do not find a major difference between physical and synthetic ETFs. We find indirect evidence that market-makers employ intraday inventory hedging both for physical and synthetic ETFs, though the extent of this might vary across ETF structures or commodity types. Furthermore, our statistical analyses (regression and Granger causality) point to the finding that structural differences do not seem to have differing implications for the bid-ask spread levels or how future bid-ask levels influence them. In other words, the ETF structure type is not a major driving factor in terms of bid-ask spreads, which are dominated by more important factors such as market-making activities and tracking volume. Here, it is important to share the results of bid-ask spread decomposition analyses for ETFs. The results show that order- iv processing cost, a measure of market-makers' remuneration, constitutes the largest bid-ask component. This confirms the importance of market-making costs, particularly for ETFs. On the other hand, the results show the adverse selection amounts to the smallest component in most cases. These findings hold both for physical and synthetic ETFs. Besides, the detailed Granger-causality investigations reveal that no particular bid-ask component systematically drives the correlations between spreads or other components. The second chapter findings remain mostly valid under the heightened volatility period. Secondary markets are able to cope well even under increased market fear. Relationships pertaining to gold and silver segments, two precious metals, do not show significant change even under stress despite their reputation as safe-haven domains. Overall, the results lead us to the conclusion that as long as there is a competitive and functioning ETF secondary market and market-making, the structural differences between ETF types do not constitute a problem from the point of view of investor protection in the secondary market. Focusing on the improvement and harmonization of market-making standards and market micro-structure is more beneficial for the long-term success of the industry than perpetuating the futile physical-versus-synthetic controversy. The thesis contributes to the academic literature on ETFs by analyzing two research questions that are of practical importance. Following a structured approach, it firstly investigates price discovery in the new commodity security landscape, which includes mini-futures and ETFs along with regular futures. Secondly, it does not focus on the physical-versus-synthetic debate in a commercial or biased approach, but rather in a systematic manner that analyzes the secondary market dynamics.
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