Arbitrage opportunities between ETFs and their underlying portfolio

Document Type : Original Article

Authors

1 Assistant Prof., Department of Finance and Insurance Management, University of Tehran, Tehran, Iran

2 M.Sc. student, Department of Finance and Insurance Management, University of Tehran, Tehran, Iran.

Abstract

This article, is going to study arbitrage opportunities between exchange-traded funds (ETFs) and their underlying portfolio. Therefore, we extract intraday data, and then carry out our research methodology to examine  arbitrage opportunities. Also, we study price and order flow behavior around the opportunities. We chose two Iranian ETFs named PALAYESH and DARA YEKOM as our research sample. In this article four variables including ETF return, underlying portfolio return, ETF order flow, and underlying portfolio order flow will be used to test our findings. After extracting data, we study the sigificant relationship between ETFs and their underlying portfolio by the Vector Autoregressive (VAR) model estimation. Finally, we found evidence about the divergence of ETF and its underlying prices and observe that mispricing correct through time by arbitrage mechanism

Keywords

References

  1. Amihud, Y. (2002). Illiquidity and stock returns: Cross-section and time-series effects, Journal of Financial Markets, 5(1), 31–56. doi: 10.1016/S1386-4181(01)00024-6.
  2. Ben-David, I., Franzoni, F. and Moussawi, R. (2018). Do ETFs Increase Volatility?, Journal of Finance, 73(6), 2471–2535. doi: 10.1111/jofi.12727.
  3. Box, T. et al. (2021). Intraday arbitrage between ETFs and their underlying portfolios, Journal of Financial Economics, 141(3), 1078–1095. doi: 10.1016/J.JFINECO.2021.04.023.
  4. Box, T., Davis, R. L. and Fuller, K. P. (2019). ETF Competition and Market Quality, Financial Management, 48(3), 873–916. doi: 10.1111/fima.12246.
  5. Broman, M. S. (2016). Liquidity, style investing and excess comovement of exchange-traded fund returns, Journal of Financial Markets, 30, 27–53. doi: 10.1016/j.finmar.2016.05.002.
  6. Christiansen, C., Joensen, J. S. and Rangvid, J. (2008). Are economists more likely to hold stocks?, Review of Finance, 12(3), 465–496. doi: 10.1093/rof/rfm026.
  7. Da, Z. and Shive, S. (2018). Exchange traded funds and asset return correlations, European Financial Management, 24(1), 136–168. doi: 10.1111/eufm.12137.
  8. janati meshkati, A., abdolbaghi ataabadi, A., & bahadoran baghbadorani, A. (2018). Miss pricing, continuation of arbitrage and returns of Exchange Traded Funds in Iran. ـJournal of Financial Management Perspective, 8(23), 105-126.
Financial Management Perspective
Volume 13, Issue 41
2023
Pages 117-143

Files

Share

How to cite

Statistics