Is the tracking error time varying? Evidence from agricultural ETCs (2018)
This study argues that the high volatility of agricultural commodity prices creates a challenge for exchange-traded commodity (ETC) managers to track the underlying index. Furthermore, previous studies find exchange-traded products replicated synthetically report a high tracking error (TE). Accordingly, this study examines the level and persistence of the TE in agricultural ETCs. In particular, we examine whether the TE of ETCs varies over time depending on agricultural commodity price volatility. According to our findings, agricultural ETC fund managers do not drift from their investment style depending on commodity price volatility. However, investors in agricultural ETCs are exposed to high TE during periods of high volatility, although it is not persistent over time. Therefore, this study also adds evidence to the argument that synthetic replication leads to high TE in ETCs.
KeywordsAgricultural Commodity Market; Event Study Methodology; Exchange-Traded Commodities; Markov Switching Regression; Tracking Error
ANZSRC Fields of Research38 - Economics::3801 - Applied economics::380101 - Agricultural economics
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