Abstract
This study is unique in examining the spillover and leverage effect of Smart Beta Exchange Traded Funds (SB ETFs) and their underlying indices and Cap-Weighted (CW) indices. We find unidirectional return spillover from most SB ETFs to CW indices and bidirectional return spillover between SB ETFs and SB indices using VAR/VECM model. Besides, we find that information is transmitted faster from SB ETFs to the indices than from indices to SB ETFs. Interestingly, we observe that innovations in SB ETFs explain 97% of variance in SB indices and 81% of variance in CW indices. Hasbrouck’s information share of SB ETFs is highest (88%) followed by CW indices (5.6%). ARIMA-GARCH model shows that bidirectional volatility spillover exists between SB ETFs and the indices. ARIMA-EGARCH model provides evidence of leverage effect in SB ETFs, highlighting that volatility increases more after negative shocks than after positive shocks. Our study provides evidence of greater information transmission from SB ETFs to SB indices and to CW indices.
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Abbreviations
- ACF:
-
Autocorrelation function
- ADF:
-
Augmented Dickey Fuller
- AIA:
-
Adaptive investment approach
- AIC:
-
Akaike information criteria
- AMC:
-
Asset management companies
- AMFI:
-
Association of Mutual Funds in India
- AMH:
-
Adaptive market hypothesis
- ARCH:
-
Autoregressive conditional heteroscedasticity
- ARCH LM:
-
Autoregressive conditional heteroscedasticity Lagrange multiplier
- ARIMA:
-
Autoregressive integrated moving average
- AUM:
-
Assets under management
- BM CW index:
-
Benchmark cap-weighted index
- BM SB index:
-
Benchmark smart beta index
- CW:
-
Cap-weighted
- CW ETFs:
-
Cap-weighted exchange traded funds
- EGARCH:
-
Exponential generalised autoregressive conditional heteroscedasticity
- ETFs:
-
Exchange traded funds
- GARCH:
-
Generalised autoregressive conditional heteroscedasticity
- HQ:
-
Hanann–Quinn
- IR:
-
Information ratio
- JA:
-
Jensen’s alpha
- NAV:
-
Net asset value
- NSE:
-
National stock exchange
- PACF:
-
Partial autocorrelation function
- RBI:
-
Reserve Bank of India
- SB:
-
Smart beta
- SB ETFs:
-
Smart beta exchange traded funds
- SD:
-
Standard Deviation
- SEBI:
-
Securities and Exchange Board of India
- SIC:
-
Schwarz information criteria
- TB:
-
Treasury bill
- VAR:
-
Vector auto regression
- VECM:
-
Vector error correction model
- R e t :
-
Logarithmic return of the SB ETF at time t
- R m t :
-
Logarithmic return of the underlying SB index at time t
- R m 2 t :
-
Logarithmic return of the CW index associated with the respective SB index at time t
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This study was funded by the Ministry of Education (MoE), India.
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All authors contributed to the study conception and design. The conceptualisation and methodology were performed by CV and MT the formal analysis and investigation as well as writing—original draft preparation was performed by CV; writing—review and editing was undertaken by MT; the funding acquisition and supervision was performed by MT. All authors read and approved the final manuscript.
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Vijaya, C., Thenmozhi, M. Spillover and leverage effect in Smart Beta Exchange Traded Funds: Evidence from India. Decision (2024). https://doi.org/10.1007/s40622-024-00376-1
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DOI: https://doi.org/10.1007/s40622-024-00376-1