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

Jitka Hilliard

Global Finance Journal, 2014, vol. 25, issue 2, 90-107

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.

Keywords: Exchange-traded funds; Premiums; Ornstein–Uhlenbeck process (search for similar items in EconPapers)
JEL-codes: G14 G15 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:25:y:2014:i:2:p:90-107

DOI: 10.1016/j.gfj.2014.06.001

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