Abstract

This study provides new evidence related to basket portfolio trading using the Canadian index participation units, TIPs. First, we determine the linkage between TIPs and the Canadian market as well as the US market. We show that TIPs are Granger-caused by the T35, the T300 and the S&P 500. Also, we find that the T35, which is the basis of TIPs, exerts a substantial impact on the T300; no relation was revealed between the T35 and the S&P 500. Second, we study the effect of issues and redemptions of TIPs on the prices of TIPs, the value of the underlying index, and the prices of the constituent companies in the context of the hypothesis of negatively sloped demand curves for equities. Not only do we uncover a positive price effect stemming from the issue of TIPs for both the constituent companies as well as the T35 Index, but we also document a stronger market impact for large as opposed to small issues. These results support the downward sloping demand curve hypothesis. In addition, we find that the abnormal returns are permanent thus supporting the imperfect substitute hypothesis as opposed to the price pressure hypothesis for new issues. The empirical evidence on the redemptions of TIPs does not support nor reject the downward sloping demand curve hypothesis. It is shown that, based on an information-cleansed sample, redemptions result in insignificant abnormal returns. Finally, it is found that the price of TIPs decreases (increases) following an issue (redemption)