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Premiums and discounts in ETFs: An analysis of the arbitrage mechanism in domestic and international funds

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  • Hilliard, Jitka

Abstract

We study premiums/discounts associated with ETFs using the Ornstein–Uhlenbeck process augmented with jumps. Our results confirm the high efficiency of the ETFs' arbitrage pricing mechanism. The median long-term mean premium of U.S. equity ETFs is zero. International equity ETFs and bond ETFs face more barriers to arbitrage, which results in higher long-term mean premiums and lower speeds of adjustment. Enhancing the mean-reverting process with jumps improves the model fit. The probability of jumps is the highest for international equity ETFs.

Suggested Citation

  • Hilliard, Jitka, 2014. "Premiums and discounts in ETFs: An analysis of the arbitrage mechanism in domestic and international funds," Global Finance Journal, Elsevier, vol. 25(2), pages 90-107.
    • Handle: RePEc:eee:glofin:v:25:y:2014:i:2:p:90-107
    DOI: 10.1016/j.gfj.2014.06.001
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    Cited by:

    1. Huyen Phuong Do & Bich Ngoc Do & Tra My Nguyen & Thinh Vu Duy, 2021. "Arbitrage with Exchange-traded Funds: A Case of E1VFVN30 Based on Intraday Data," Economic Research Guardian, Mutascu Publishing, vol. 11(1), pages 130-143, June.
    2. Atanasova, Christina & Weisskopf, Jean-Philippe, 2020. "The price of international equity ETFs: The role of relative liquidity," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 65(C).
    3. Marszk, Adam & Lechman, Ewa, 2021. "Reshaping financial systems: The role of ICT in the diffusion of financial innovations – Recent evidence from European countries," Technological Forecasting and Social Change, Elsevier, vol. 167(C).
    4. Priya Malhotra & Pankaj Sinha, 2023. "Exchange-traded Funds in India Amid COVID-19 Crisis: An Empirical Analysis of the Performance," Metamorphosis: A Journal of Management Research, , vol. 22(1), pages 38-54, June.
    5. Goel, Garima & Ahluwalia, Eshan, 2021. "Do pricing efficiencies in Indian equity ETF market impact its performance?," Global Finance Journal, Elsevier, vol. 49(C).
    6. Gregory Boadu-Sebbe, 2022. "Effect of Exchange-Traded Funds Arbitrage Transactions on their Underlying Holdings," CERGE-EI Working Papers wp738, The Center for Economic Research and Graduate Education - Economics Institute, Prague.

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    More about this item

    Keywords

    Exchange-traded funds; Premiums; Ornstein–Uhlenbeck process;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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