Tracking Errors and Long-Run Performance of Leveraged ETFs

Leveraged exchange-traded funds (ETFs) are relatively new to the world of investments but have become increasingly popular to aggressive investors. While a regular ETF tracks the value of a specific index of stocks, a leveraged ETF attempts to achieve a multiple of the return of the underlying index on a daily basis. This multiple can be positive in the case of bull ETFs or negative in the case of bear (or inverse) ETFs. To accomplish these objectives, leveraged and inverse funds pursue a range of investment strategies through the use of swaps, futures contracts, options and other derivative instruments. Due to the effect of compounding, operating expenses and daily resets, not to mention tracking errors, the performance of leveraged funds over longer periods of time can differ substantially from the performance (or inverse of the performance) of their underlying index or benchmark during the same period of time. Such performance deviations are often quite meaningful and unexpected over the long run. This paper provides an empirical assessment of how well the leveraged ETFs track their underlying index. The results show that the tracking errors on average are small. However, substantial tracking errors do occur from time to time. Despite the price decay associated with leveraged ETFs, their long-run performance

A Looming US-China Trade War

China exports more to the United States than US exports to China. The resulting trade deficit against China has been a major issue during the presidential campaign and now is a real issue facing the Trump administration. President Trump has claimed repeatedly that China is “stealing our jobs” and China is a “currency manipulator.” The currency manipulation designation can easily escalate to a trade war with China. Several questions arise: (1) Is China a currency manipulator? (2) Is a looming trade war with China inevitable? (3) Who are the losers and winners in a trade war? These are not easy questions. The answers lie not only in sound economic analyses, but also in wise political judgements

Dichotomy of Chinese Domestic and Overseas IPOs

Due to regulatory constraints, many Chinese companies pursue overseas listings in HongKong and U.S. without being first listed in the domestic market. Some of them have, often after many years, eventually returned to the mainland by offering A-shares to domestic investors. This unique feature of cross-listed Chinese stocks provides a natural experiment field to test conventional IPO theories, which suggest less underpricing in homebound IPOs.Using a sample of Chinese IPOs made from 1990 to 2007, we find that substantial underpricing still prevails in homecoming IPOs by those already listed abroad, with an average first-day return of 96.38%. After control for firm size and potential selfselection bias, these IPOs do not differ on the first day of trading than purely domestic offerings. The hot short-run performance in their A-share debuts is in sharp contrast to what they experienced in their overseas listings: The mean first-day return is merely 5.75% for their ADRs and 11.55% for their Hong Kong IPOs

Rapid Economic Growth without Economic Freedom: A Puzzle Made in China

Adam Smith's well-known book, An Inquiry into the Nature and Causes of the Wealth of Nations, shows that free markets, the protection of private property rights and a minimal government interference in the economy lead to prosperity. The development economics literature has expansive evidence that economic freedom and sound legal, financial and political institutions boost economic growth. China's economy has grown by nearly 10% each year for over three decades. Yet China's phenomenal economic growth has been accompanied by a relatively underdeveloped legal and financial system. For instance, China is the 124th freest economy in the 2008 Index of Economic Freedom. China seems to be an outlier in the economic growth and freedom literature

Underpricing of Homecoming A-Share IPOs by Chinese Firms Already Listed Abroad

Many Chinese firms have pursued overseas listings in Hong Kong or U.S. without being first listed in China’s domestic market, mainly due to the regulatory constraints imposed by the Chinese government. Some of them eventually returned to mainland China through an A-share offering to Chinese investors. This unique feature of cross-listed Chinese stocks offers an experiment field to test some of the conventional theories of IPO underpricing. Homebound IPOs are expected to be less underpriced than domestic only IPOs that are not cross-listed because being already listed in a developed market can mitigate the information asymmetry and issue uncertainty associated with their A-share IPOs. Nevertheless, we find that homecoming A-share IPOs are still substantially underpriced, with an average market adjusted first day return of 96.53%. Furthermore, their first-day returns are not significantly different from those of domestic only IPOs once firm- and offer characteristics are controlled. This is in sharp contrast to the lukewarm aftermarket performance experienced in their overseas debuts. Overall, our results suggest the importance of local market structures and norms as influential factors of IPO underpricing

Statistical Properties and Empirical Assessments of Leveraged ETFs

Leveraged exchange-traded funds (ETFs) are relatively new to the world of investments but have become increasingly popular to aggressive investors. While a regular ETF tracks the value of a specific index of stocks, a leveraged ETF attempts to achieve a multiple of the return of the underlying index on a daily basis. This multiple can be positive in the case of bull ETFs or negative in the case of bear (or inverse) ETFs. To accomplish these objectives, leveraged and inverse funds pursue a range of investment strategies through the use of swaps, futures contracts, options and other derivative instruments. Due to the effect of compounding, operating expenses and daily resets, not to mention tracking errors, the performance of leveraged funds over longer periods of time can differ substantially from the performance (or inverse of the performance) of their underlying index or benchmark during the same period of time. Such performance deviations are often quite meaningful and unexpected over the long run. This paper evaluates the nature and statistical properties of leveraged and inverse ETFs and in particular the long-run impacts as compared to their underlying indexes. It also provides an empirical assessment a sample of such ETFs

Tariffs, Economic Growth and Income Distribution

The United States has a huge trade account deficit—$753 billion in 2016. President Trump has asserted that a more restrictive trade policy which involves tariffs and quotas would help to achieve his goal of boosting U.S. economic growth to 3-plus per cent. On March 1, 2018, Mr. Trump announced unexpectedly that the U.S. would impose tariffs of 25 percent on steel imports and 10 percent on aluminum. He later twitted that “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win.” The World Trade Organization (TWO) immediately issued a rare warning about Trump’s plan saying it risks a trade war. Do tariffs promote or hurt economic growth? This poster tries to shed some lights on this important question from both theoretical and empirical perspectives. If tariff-growth relationship is neutral or negative, then what are the consequences on income distribution—i.e., who are the winners and who are the losers

Can Chinese Yuan Become A Major Reserve Currency?

After several years of efforts, especially on the part of the Chinese government, the International Monetary Fund (IMF) announced on November 30, 2015 that the Chinese currency, yuan (RMB or人民币), will be included into the Special Drawing Right (SDR) basket, starting in October 2016. The SDR is an artificial currency created in 1969 to implement the U.S. dollar as an reserve asset. The SDR has been used as the unit of account in IMF. Currently, the SDR consists of four currencies: $, €, £, and ¥. These four currencies are also the major reserve currencies held by the central banks. Two questions arise: Is the RMB ready to be a major reserve currency? What are the benefits and costs of being a reserve currency

Asymmetric Information and IPO Size of Newly Listed Chinese Companies

We build a model of an IPO for firms with private information about their earnings profile over time and test the model’s predictions using a complete sample of newly listed Chinese companies between 1992 and 2007. The model predicts that IPO size is positively correlated with short-term operating performance that is not directly consistent with traditional theories. It also provides an explanation for negative correlation between debt and profitability that is not consistent with standard trade-off theory or signaling theory. The empirical results provide strong support for our model

Economic Growth and Freedom: A Cross-Country Analysis

Understanding the nature and causes of economic progress has been a challenge to development economists. The classic theory sees the economy as a production machine that transforms labor, natural resources and capital into output. In development economics, attention has therefore shifted to how and what degree economies succeed in realizing their potential. Development economists have started to take an interest in economic and political institutions. They are interested in two fundamental questions: How do different institutions affect economic development and growth? And how and why do good institutions arise? Recent empirical work has analyzed country-level GDP data and various measures of legal, financial, and political institutions to uncover which institutions are associated with more rapid economic growth. This study contributes to this line of research by investigating the association between economic freedom, economic growth, and economic wellbeing