Add time:09/05/2019         Source:sciencedirect.com

The paper examines the relative efficiency of gold Exchange Traded Funds (ETF) against spot gold and gold futures in Indian scenario using a series of conventional and threshold cointegration statistics. The results reveal that gold ETFs and spot gold as well as gold ETFs and gold futures converge together in the long run. Also, movements in spot prices and futures prices are found to lead those in ETF prices, thus, providing scope for executing profitable trading strategies in ETFs. The study further explores the probable reasons that might account for the relative inefficiency observed in ETF prices.Extended Summary: Gold ETFs and gold futures represent two such segments that enable investors gain exposure to the price movement of gold in a manner similar to that of stocks traded at the exchange. With different segments of the market tracking the same asset class, the present study attempts to investigate the relative efficiency of one market over the other i.e. between spot price of physical gold and gold ETFs as well as between gold ETFs and gold futures in Indian context which accounts for one of the largest consumers of the metal in the world. Using various econometric techniques such as cointegration, Vector Error Correction Model (VECM), Gregory-Hansen (1996) statistics and Toda-Yamamoto test of causality, the results reveal that gold ETFs, when compared to their spot and futures counterparts, are relatively inefficient. ETF prices are found to lag both the spot as well as futures prices. Limited participation, limited awareness, illiquidity and absence of margin trading are found to be the prime reasons explaining the relative inefficiency of gold ETFs. The study also provides for the caution that needs to be exercised while interpreting the results for linear cointegration which may fail to detect the existence of long run relationship between the variables in the presence of structural break inherent in the data series.

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