Paul is an experienced trader who has covered many emerging market corporations and sovereigns including Lebanon, Turkey, GCC, Eastern Europe, and Latin America. With more than 12 years of experience, he has an extensive knowledge in capital and money markets as well as foreign exchange
markets. Paul also publishes internal research on the global economic conditions and any news that could affect the financial markets.
Since their inception, Exchange traded funds have been very interesting financial instruments. Despite the fact that currency exchange traded funds have showed major growth in both numbers and volumes, few studies covered the performance of currency exchange traded funds and the variables affecting this performance.
This report fills this gap by presenting a theoretical framework on the subject .The author develops a model on the effect of volatility, leverage, trading hours overlap and non-deliverable forwards on the performance of currency exchange traded funds, measured in terms of tracking errors.
To achieve this goal an extensive review of the literature on exchange traded funds was conducted. The literature review contributed to the definition of a general framework on the volatility, leverage, trading hours and non-deliverable forwards on the performance of exchange traded funds. The next step was to present a conceptual model which would explore the relationship of these variables. This conceptual model was then tested on an empirical investigation. The experimental fieldwork was conducted on currency exchange traded funds covering different currencies with different structures on a sample of above 101,000 observations. In order to test the hypotheses different statistical analysis were conducted.
The results showed that there is a direct negative relation between the trading hours overlap and the tracking errors of the currency exchange traded funds; while the leverage, non-deliverable forwards and volatility showed direct positive relation with the tracking errors of currency exchange traded funds.
These results provide interesting and valuable insights to investment managers on the use of currency exchange traded funds. When designed properly, a portfolio of currency exchange traded funds can provide a very good replication strategy for investment managers. The results also contribute to the academic world with new knowledge on the effect of volatility, leverage, trading hours overlap and non-deliverable forwards on currency exchange traded fundsKey words: Volatility, leverage, trading hours overlap, non-deliverable forwards, currency exchange traded funds.