Abstract
BackgroundGold exchange-traded funds, since introduction, are primarily aimed at tracking the price of physical gold in the financial market. This, a category of exchange-traded funds, whose units represent physical gold, is traded on exchanges like any other financial instrument. In the Indian financial market, gold exchange traded funds were introduced a decade ago to facilitate ordinary households' participation in the bullion market. They were also designed to assist in the price discovery mechanism of the bullion market.Presentation of the hypothesisIn this paper, it is attempted to check if one of the constituents of price discovery mechanism, informational efficiency, has been achieved in gold exchange-traded funds’ market. Information efficiency becomes evident only when all available information is reflected in the market price of the instrument.Testing the hypothesisTherefore, in order to assess the weak-form efficiency of the gold exchange-traded funds market, the daily returns of five gold exchange-traded funds traded on the Indian Stock Exchange over the period March 22, 2010, to August 28, 2015, were used. The non-parametric runs test, the parametric serial correlation test, and the augmented Dickey-Fuller unit root test are employed.Implications of the hypothesisThe test results provide evidence that the efficient market hypothesis does not hold for the gold exchange-traded funds’ market in India. Further, the test results address several underlying issues with respect to price discovery in the market under study and suggest that the Indian market for this derivative is not weak-form efficient. Hence, the factors affecting gold exchange traded-funds’ market warrant the attention of the country’s regulatory bodies, as appropriate legislation in support of market efficiency is needed.
Highlights
Gold exchange-traded funds, since introduction, are primarily aimed at tracking the price of physical gold in the financial market
exchange-traded fund (ETF) investing in physical commodities that can be traded on a derivative market are called commodity ETFs
The tests of stationarity employed in this paper suggest, that the daily price changes are not arbitrary and the logarithm difference series of closing prices are stationary
Summary
Gold exchange-traded funds, since introduction, are primarily aimed at tracking the price of physical gold in the financial market. In the Indian financial market, gold exchange traded funds were introduced a decade ago to facilitate ordinary households' participation in the bullion market. They were designed to assist in the price discovery mechanism of the bullion market. Investors in ETFs are not exposed directly to the assets, but indirectly own them as their ownership is divided into shares and they are remunerated by the pay-offs that are usually a proportion of profits or a residual value when the fund is liquidated. The other types of ETFs track the prices of assets or the assets’ indices either directly or indirectly
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