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

Christoph Schmidhammer, Sebastian Lobe and Klaus Röder
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Christoph Schmidhammer: Hochschule der Deutschen Bundesbank – University of Applied Sciences

Journal of Asset Management, 2014, vol. 15, issue 2, No 4, 129-149

Abstract: 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.

Keywords: DAX futures; exchange traded funds; indicative net asset value; index certificates; DAX index; replication quality (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (3)

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DOI: 10.1057/jam.2014.13

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