The Nonlinear Price Dynamics of U.S. Equity ETFs

We investigate the price dynamics of large market-capitalization U.S. equity exchange-traded funds (ETFs) in order to uncover trader motivations and strategy. We show that prices of highly liquid ETFs can deviate significantly from their daily net asset values. By adjusting for changes in valuations, we report the impact of non-classical variables including price trend and volatility using data from 2008 to 2011. We find a cubic nonlinearity in the trend suggesting traders are aware not only of the underreaction of others, but also self-optimize by anticipating others' reactions, and sell when the uptrend is stronger than usual