The strategy trades UK iShare ETF and SPY US, exploiting NAV-based premiums/discounts exceeding 50bp, forecasting NAV via FTSE and Pound returns, holding daily positions opened at US close.
ASSET CLASS: ETFs | REGION: Global | FREQUENCY:
Daily | MARKET: equities | KEYWORD: Simple, NAV, Arbitrage,Country, ETFs
I. STRATEGY IN A NUTSHELL
The strategy trades international ETFs, forecasting the UK iShare ETF NAV at the US market close. If the ETF trades more than 50bp away from this forecast, the investor goes long or short the ETF while hedging with SPY, holding positions for one day to capture pricing inefficiencies.
II. ECONOMIC RATIONALE
iShare ETF prices may overreact to late-day US market news. These overreactions cause predictable next-day price adjustments, allowing the strategy to exploit systematic deviations between ETF prices and their forecasted NAVs.
III. SOURCE PAPER
Overreaction and Trading Strategies in European iShares [Click to Open PDF]
Simon, Department of Finance, Bentley College; Stenberg, Graduate School of Management, Clark University
<Abstract>
This paper examines the forecasting power of German, UK and French iShares for the next day returns of the underlying Morgan Stanley country equity indexes and assesses whether European iShares overreact to developments after the close of European trading. The findings indicate that although deviations of European iShare prices from net asset values (NAVs) at the close of US trading have significant forecast power for next day NAV returns, they overpredict. Deviations of closing iShare prices from their NAVs also lead to next day iShare price reversals that average roughly 3/8 of the size of the deviations. Finally, the paper demonstrates the profitability of trading rules that exploit the tendency of European iShares to overreact to late day US trading activity.
IV. BACKTEST PERFORMANCE
| Annualised Return | 33.88% |
| Volatility | N/A |
| Beta | N/A |
| Sharpe Ratio | N/A |
| Sortino Ratio | N/A |
| Maximum Drawdown | N/A |
| Win Rate | N/A |
