Date of Award
Doctor of Philosophy
Academic research studies financial innovations and the impact that new financial products have on both investors and the overall market. This dissertation expands on the financial innovations literature by analyzing a relatively recent innovation, exchange traded notes (ETNs). Chapter 1 examines the market frictions that the introduction of ETNs may have resolved. The results suggest that ETNs provide investment characteristics not easily replicated with existing ETFs; however, the uniqueness of ETN returns are concentrated within certain ETN objectives. I also document the presence of inverse-pair ETNs and find that inverse-pair ETNs have more efficient prices than other non-pair ETNs. Chapter 2 examines whether institutional preferences for equities are applicable to the ETN market and institutional investors' involvement in the ETN lending market. The results suggest that institutional investors apply liquidity and risk preferences when it comes to selecting ETNs. Focusing on an institutionally determined segment of trading, the short sales market, I find support for institutions' role as suppliers to the securities lending market. Chapter 3 looks at the types of ETNs that mutual funds are attracted to, the characteristics of the mutual funds that are investing in ETNs, and the ETN shares held short by mutual funds. Mutual funds prefer derivative-like ETNs. Thus, ETNs may serve as a means to get around investment constraints. However, counter to what is hypothesized, results of tests on the types of mutual funds holding ETNs suggest that it is the low-constraint mutual funds that hold ETNs. Last, despite the constraints related to short selling, mutual funds hold short positions of ETNs. Mutual fund managers seem to possess skill in these investments.
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