Does intervalling effect affect ETFs?

Abstract

Purpose

This paper aims to investigate the intervalling effect bias in ETFs' systematic risk expressed by beta. The authors' findings reveal the existence of a significant intervalling effect on ETFs' beta obtained by the ordinary least squares method (OLS). Also investigated is the impact of ETFs' capitalization on beta. Results provide evidence that small cap ETFs have greater betas than large cap ETFs. Results also reveal that the OLS beta of all ETFs increases when the return interval is lengthened regardless of capitalization. The impact of ETFs' trading activity on systematic risk is assessed too. Findings give evidence that the OLS betas of the ETFs that trade infrequently are biased downwards while the beta of the frequently traded ETFs is biased upwards. Finally, the paper reveals a strong intervalling effect on ETFs' tracking error.

Design/methodology/approach

The authors employ a sample of 40 broad‐based ETFs listed on Nasdaq Stock Exchange to test whether beta estimates change when the return interval measurement changes. Their data cover a maximum period of ten years starting from September 16, 1998 using daily, weekly and monthly return data. The authors estimate beta applying three alternative methods: the market model applied with the OLS method, the Scholes and Williams model (SW beta) and the Dimson model (Dim beta).

Findings

Results indicate that the average beta of ETFs derived by the OLS method increases when the return interval increases. The differences among the daily, weekly and monthly OLS betas are statistically significant at the 1 per cent level. This finding implies a strong intervalling effect bias in ETFs' OLS beta. On the other hand, the authors did not find any statistically significant differences in daily, weekly and monthly Scholes and Williams and Dimson betas. Moreover, results show that the daily and weekly OLS and Scholes and Williams betas and weekly OLS and Dimson betas are significantly different from each other.

Originality/value

In this paper using a sample of 40 broad‐based ETFs listed on Nasdaq Stock Exchange, the authors have examined various issues concerning: the intervalling effect bias in ETFs' systematic risk, the relation between beta and capitalization of ETFs, the relation between beta and trading frequency of ETFs and, finally, the intervalling effect bias in ETFs' tracking error. While the literature on intervalling effect on securities' beta and the relation between systematic risk and market value and trading activity is voluminous, this is the first attempt to examine these issues with respect to ETFs.

Citation

Milonas, N.T. and Rompotis, G.G. (2013), "Does intervalling effect affect ETFs?", Managerial Finance, Vol. 39 No. 9, pp. 863-882. https://doi.org/10.1108/MF-01-2010-0004