Application of Demand Analysis Framework to Understand the Price and Volume Movements of Exchange Traded Funds (ETFs)

Exchange Traded Funds (ETFs), allow for the study of the demand for investment in a commodity or an industry surrounding a commodity. They are comparable to mutual funds where they separate ownership among shares and are a combination of several assets. ETFs are marketable securities traded on stock exchanges and are available in following industries: commodities, consumer, financial, health, natural resources, real estate, technology, and utilities. Objective of this paper is to assess the usefulness of using an ETF’s volume as a proxy for demand and the price as the independent variable to determine if demand relationships exist between the two measures. Daily price and volume data for 21 oil and natural gas ETFs was collected from Bloomberg for five years (March 2010 - December 2014). The energy ETFs were categorized into oil, natural gas and general energy. A system of demand equations was developed for aforementioned energy ETFs using seemingly unrelated regression method. Preliminary results show that, own-price elasticity of demand for oil and natural gas is -0.69 and -0.27. Also, we find that natural gas and oil are substitutes, which is generally observed in energy markets. Consequently, the use of ETFs as proxies for their industries shows promise.

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JEL Codes:
G11; G12; C39
applying demand analysis framework towards financial market data

 Record created 2017-04-01, last modified 2018-01-23

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