The effects of creations and redemptions in the index participation unit market : evidence of the downward sloping demand curve for equity

• Main Author: Duguay-Arbesfeld, Jonathan
• Format: Others
• Published: 2001
• Online Access: http://spectrum.library.concordia.ca/1345/1/MQ59279.pdf; Duguay-Arbesfeld, Jonathan <http://spectrum.library.concordia.ca/view/creators/Duguay-Arbesfeld=3AJonathan=3A=3A.html> (2001) The effects of creations and redemptions in the index participation unit market : evidence of the downward sloping demand curve for equity. Masters thesis, Concordia University.

A number of finance papers have shown that the downward sloping demand curve for equity exists. Many of these previous studies have come to their conclusion via one of two ways. The first method looks at new equity offerings by companies and their affect on stock returns due to increase in supply. The second looks at company inclusion into the S&P 500 Composite Index and its effect on company returns due to increase in demand from index mutual funds. In both cases there has been evidence of the downward sloping demand curve but skeptics still persist due to the inability of these techniques to eliminate company specific information. The use of creations and redemptions of IPUs in the verification of the downward sloping demand curve has the benefit of being free of company specific pressures since they are stand alone equity products. Standard & Poor's Depository Receipts (SPDRs) are the IPU under study in this paper. Through the use of standard event studies we have found that with larger or infrequent creations and redemptions there exists support for the downward sloping demand curve exists. More specifically, with creations we observe negative abnormal returns and with redemptions we observe the reverse. When new creations and redemptions in SPDR units take place, a demand and supply shift occurs in the market due to purchases and sales of S&P 500 portfolio baskets. We found strong evidence that redemptions of SPDRs affects the returns of the underlying stocks of the S&P 500. The negative significance would imply that redeeming parties are not liquidating the equity basket upon receipt. When we eliminate company specific information results persist in large redemptions