The Price Formation of GCC Country iShares: The Role of Unsynchronized Trading Days between the US and the GCC Markets

Nassar S. Al-Nassar ()
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Nassar S. Al-Nassar: Department of Finance, College of Business and Economics, Qassim University, Buraydah 51452, Saudi Arabia

JRFM, 2024, vol. 17, issue 10, 1-26

Abstract: Some US-listed country exchange-traded funds (ETFs) suffer from chronic and meaningful mispricing in the form of premiums or discounts relative to their fundamental value despite the presence of the creation/redemption mechanism. This mispricing is mainly attributed to the staggered information flow due to nonoverlapping time zones between the market where the ETF is listed and its underlying home market. This study provides out-of-sample evidence on the price formation of Gulf Cooperation Council (GCC) country ETFs and gauges the impact of mispricing on their underlying home markets. The GCC context is particularly insightful because these markets have nonoverlapping time zones with the US and follow distinct trading schedules. Our sample comprises daily data from three countries’ iShares that exclusively track the Qatari, Saudi, and Emirati stock markets from 17 September 2015 to 14 March 2023. The results show that GCC ETFs are driven mainly by their net asset values (NAVs), albeit imperfectly, while the S&P500 exerts a relatively mild influence on these ETFs compared to other country ETFs, as reported by prior studies. Moreover, we find that crude oil prices positively and significantly impact GCC ETFs’ pricing. When we control for unsynchronized trading days between the US and the GCC home markets, we find a structural difference between overlapping and nonoverlapping trading days. This structural difference manifests in a sluggish adjustment to correct mispricing in the ETF market on the day the home market is closed; however, other variables, including the S&P500, show no discernible difference, which refutes the overreaction explanation. This recurrent pattern is reflected in a clear day-of-the-week pattern in the price discovery these ETFs offer to their underlying home markets.

Keywords: ETF; market efficiency; arbitrage; gulf cooperation council; non-bank financial intermediation; financial markets (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2024
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