Are global Exchange Traded Fund pretentious on exchange rate fluctuation? A study using GARCH model
2020
Abstract
Investors invest in a foreign market to reap the benefits of currency differences. The
change in the value of underlying assets affects these hedged funds and, at the same
time, restricts investors from higher return possible in unhedged funds. This study
aims to examine the performance of most actively traded shares in Exchange Traded
Fund and any influence, along with tracking the information from the index. This
study also analyzes the currency fluctuation and its impact on returns and volatility of
ETF and index. The equity ETF, which tracks NASDAQ (NDX 100), is chosen for the
study, and the data analysis is carried out using statistical methods such as correlation,
regression, and GARCH model. The study utilizes the currency rate data from 2013
to 2018 of USD, GBP, and INR and examines its effect on the NDX (NASDAQ). The
study emphasizes whether the ETF as a basket of securities is insensitive to currency
rate fluctuations. It is found that the response of ETF to the currency movements is
likely due to its underlying index. The study concludes that Motilal Oswal shares in
NASDAQ 100 ETF are highly sensitive to the NDX 100 movements; thus, there is no
direct impact between ETF and index performance through exchange rate fluctuation.
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