Explanatory factors of Eurozone equity ETF tracking error
Purpose: According to the existing literature, it remains unclear whether a specific ETF outperforms or underperforms its benchmark index in terms of tracking error, especially during crisis periods. Therefore, this study concentrates on the largest and most liquid Eurozone equity ETF, iShares Euro...
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Faculty of Economics and Business in Osijek
2024-01-01
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| Series: | Ekonomski Vjesnik |
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| Online Access: | https://hrcak.srce.hr/file/471313 |
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| author | Josip Arnerić Luka Osojnik |
| author_facet | Josip Arnerić Luka Osojnik |
| author_sort | Josip Arnerić |
| collection | DOAJ |
| description | Purpose: According to the existing literature, it remains unclear whether a specific ETF outperforms or underperforms its benchmark index in terms of tracking error, especially during crisis periods. Therefore, this study concentrates on the largest and most liquid Eurozone equity ETF, iShares Euro Stoxx 50, which tracks the Euro STOXX 50 index, with the fundamental objective of identifying explanatory factors of tracking errors during crisis periods, encompassing the COVID-19 pandemic and the onset of the Ukrainian war.
Methodology: The added value of current research lies in the utilization of Markov regime switching regression with two-state variables. This approach is supported by the idea that the influence of explanatory factors on tracking error may vary between bearish and bullish regimes, which typically align with non-crisis and crisis periods, respectively.
Results: Empirical findings indicate that an increase in volatility led to a stronger decrease in tracking error during periods of market stress than in a bullish regime, while a negative impact of illiquidity on tracking error is similar for both regimes. Unlike a single-regime model, Markov switching exhibits a negative relationship between the net flows and tracking error, as expected. The effect of premium/discount seems to be both positive and negative, but a weaker influence was found during a bearish regime due to herding behavior of investors or higher trading costs.
Conclusion: This study relies on an ex-ante approach with its main advantage of providing a forward-looking estimate of tracking error that takes into account changes in market conditions and the ETF’s underlying holdings, unlike historical or ex-post tracking error. |
| format | Article |
| id | doaj-art-7e0e39cb27e14d218fec6a3b7e6fa872 |
| institution | Kabale University |
| issn | 0353-359X 1847-2206 |
| language | English |
| publishDate | 2024-01-01 |
| publisher | Faculty of Economics and Business in Osijek |
| record_format | Article |
| series | Ekonomski Vjesnik |
| spelling | doaj-art-7e0e39cb27e14d218fec6a3b7e6fa8722025-01-07T11:12:47ZengFaculty of Economics and Business in OsijekEkonomski Vjesnik0353-359X1847-22062024-01-0137223525010.51680/ev.37.2.3Explanatory factors of Eurozone equity ETF tracking errorJosip Arnerić0Luka Osojnik1University of Zagreb, Faculty of Economics and Business, Zagreb, CroatiaUniversity of Zagreb, Faculty of Economics and Business, Zagreb, CroatiaPurpose: According to the existing literature, it remains unclear whether a specific ETF outperforms or underperforms its benchmark index in terms of tracking error, especially during crisis periods. Therefore, this study concentrates on the largest and most liquid Eurozone equity ETF, iShares Euro Stoxx 50, which tracks the Euro STOXX 50 index, with the fundamental objective of identifying explanatory factors of tracking errors during crisis periods, encompassing the COVID-19 pandemic and the onset of the Ukrainian war. Methodology: The added value of current research lies in the utilization of Markov regime switching regression with two-state variables. This approach is supported by the idea that the influence of explanatory factors on tracking error may vary between bearish and bullish regimes, which typically align with non-crisis and crisis periods, respectively. Results: Empirical findings indicate that an increase in volatility led to a stronger decrease in tracking error during periods of market stress than in a bullish regime, while a negative impact of illiquidity on tracking error is similar for both regimes. Unlike a single-regime model, Markov switching exhibits a negative relationship between the net flows and tracking error, as expected. The effect of premium/discount seems to be both positive and negative, but a weaker influence was found during a bearish regime due to herding behavior of investors or higher trading costs. Conclusion: This study relies on an ex-ante approach with its main advantage of providing a forward-looking estimate of tracking error that takes into account changes in market conditions and the ETF’s underlying holdings, unlike historical or ex-post tracking error.https://hrcak.srce.hr/file/471313ETF tracking errorEurozone equity marketcrisisMarkov switching regression |
| spellingShingle | Josip Arnerić Luka Osojnik Explanatory factors of Eurozone equity ETF tracking error Ekonomski Vjesnik ETF tracking error Eurozone equity market crisis Markov switching regression |
| title | Explanatory factors of Eurozone equity ETF tracking error |
| title_full | Explanatory factors of Eurozone equity ETF tracking error |
| title_fullStr | Explanatory factors of Eurozone equity ETF tracking error |
| title_full_unstemmed | Explanatory factors of Eurozone equity ETF tracking error |
| title_short | Explanatory factors of Eurozone equity ETF tracking error |
| title_sort | explanatory factors of eurozone equity etf tracking error |
| topic | ETF tracking error Eurozone equity market crisis Markov switching regression |
| url | https://hrcak.srce.hr/file/471313 |
| work_keys_str_mv | AT josiparneric explanatoryfactorsofeurozoneequityetftrackingerror AT lukaosojnik explanatoryfactorsofeurozoneequityetftrackingerror |