However, we also report a larger, economically significant discount for MidCap SPDRs. MidCap SPDRs are designed to track the performance of the S&P MidCap 400 index, an index of moderate capitalization firms, and are expected to have higher arbitrage costs.
We investigate and compare pricing in the SPDRs and MidCap SPDRs markets.
We also find that SPDRs and MidCap SPDRs returns are not excessively volatile, unlike the returns to closed-end funds (Pontiff, 1997).
We compare the extent of mispricing in SPDRs and MidCap SPDRs. The two securities, though very similar, have different dividend yields with S&P500 SPDRs having the higher yield.
We compare pricing in the SPDRs and MidCap SPDRs markets because, though the two securities are very similar, they differ in two important respects.
The design of MidCap SPDRs is very similar to that of SPDRs.
Because the S&P500 index consists of larger companies, it is easier to replicate than the S&P MidCap 400 index and, thus, MidCap SPDRs may have higher fundamental risk.
In order to examine pricing efficiency and the impact of arbitrage costs, we estimate and compare the extent of mispricing in SPDRs and MidCap SPDRs. Assuming the Trusts successfully track the underlying indexes and, for the moment, ignoring the effect of dividends, we expect the prices of the depositary receipts to closely track their underlying indexes.
Examinations of the percentage (unadjusted and adjusted) discounts in MidCap SPDRs result in similar conclusions.
Analogous to the SPDRs data discussed above, we obtained price and index data for MidCap SPDRs from the CRSP and DRI databases.
Table III reports summary statistics for the percentage discount each day since introduction of the two depositary receipts: January 1993 through December 1997 for the SPDRs and April 1995 through December 1997 for the MidCap SPDRs.  The discount is calculated using two SPDR series: unadjusted and adjusted to reflect the accrued dividends that would be paid on redemption.
Similarly, the average unadjusted (adjusted) discount in MidCap SPDRs is 1.0363 (1.3167) and, with a t-statistic of 21.72 (47.69), the discount is statistically significant at the 0.01 level.