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The real benchmark of DAX index products and the influence of information dissemination: A natural experiment

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Abstract

Analysing 5 exchange traded funds (ETFs) and 26 index certificates, this is a comprehensive intraday study combining the perspective of information dissemination and pricing quality. We focus on the Volkswagen extreme event day on 28 October 2008, where a breakdown of the futures-cash arbitrage relationship offered the unique opportunity to identify the true benchmark of index-related products free from market microstructure noise. Although product information prospectuses promise to follow the DAX, we discover that the price quote level of DAX futures contracts became the one-on-one benchmark for all ETFs and for nearly all index certificates. We identify deviations between ETFs and their fair value exceeding 4 per cent. This is striking because the creation redemption process is assumed to restrict deviations. Analysing price information dynamics, we find that the revelation of new information to the market does not determine the price quote setting strategy of market makers during the extreme event. Hedging opportunities deliver a substantive argument to support the benchmark position of DAX futures.

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Notes

  1. Further articles that analyse the pricing characteristics of index products are, for example, Chen et al (2009), who observe a reduced cash-futures pricing efficiency after the introduction of penny pricing, or Rompotis (2010b), who focuses on performance and tracking characteristics of Asian ETFs.

  2. Media reports claim that a short squeeze has led to the extraordinary rise of Volkswagen shares. Our data set does not permit the identification of short squeeze-based trades. However, the existence of a short squeeze would lead to an increased demand in Volkswagen shares, and prices are expected to rise. Analysing the number of shares as well as share prices on 28 October 2008, we observe extensively traded Volkswagen shares when prices reached their peak (for example, when 1 822 444 shares were traded between 9:30 and 10:00, prices averaged €955.34, while share prices decreased to €681.50 between 16:00 and 16:30, when 271 014 shares were traded), indicating the existence of a short squeeze.

  3. On 24 October 2008, the trading day before Porsche’s announcement, the closing value of Volkswagen shares accounted for €210.85. Price peaks of up to more than €1005 were recorded on 28 October 2008.

  4. Funke et al (2009) describes the consequences of the price jump of Volkswagen shares on DAX index weights.

  5. Institutional investors and market makers trade over the counter at Net Asset Values, which represent fair fund values determined at the end of a trading day.

  6. Our data did not permit us to use the prices of index certificates.

  7. Because product adjustment factors (see Formula 2) are constant during the day, they are not necessarily required for the regression analyses estimated in the sections ‘Robustness of the results’ and ‘Conclusions’.

  8. Further examples are, for example, Lauterbach and Wohl (2001), who study noise as well as the correction process of prices, or Hansen and Lunde (2006), who analyse noise in high frequency data.

  9. Index certificate Cert 4 is selected as a reference product.

  10. DAX futures prices are discounted on a daily basis to make the two markets comparable.

  11. The Hasbrouck results remain qualitatively robust including different lags. A Granger causality analysis (not reported), as described in the section ‘Robustness of the results’, shows that the DAX futures drive the DAX the days surrounding the Volkswagen extreme event, while the reverse direction is valid on 28 October 2008.

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Acknowledgements

For their comments and suggestions, we would like to thank editor, an anonymous referee, and participants of the 20th Anuual Meeting of the German Finance Association (DGF) 2013, and Campus for Finance Research Conference (Otto Beisheim School of Management) 2013. All errors and omissions are our responsibility.

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Authors and Affiliations

  1. Hochschule der Deutschen Bundesbank – University of Applied Sciences, Schloss, Hachenburg, 57627, Germany

    Christoph Schmidhammer

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  1. Christoph Schmidhammer
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  2. Sebastian Lobe
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  3. Klaus Röder
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Appendices

Appendix A

Table A1

Table A1 Influence of relative price differences between the DAX and the DAX futures on relative price differences between the DAX and pooled DAX spot products, applying ETF prices and ETF midquotes
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Appendix B

Table B1

Table B1 Features of the leading equity indices around the world
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Schmidhammer, C., Lobe, S. & Röder, K. The real benchmark of DAX index products and the influence of information dissemination: A natural experiment. J Asset Manag 15, 129–149 (2014). https://doi.org/10.1057/jam.2014.13

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