Financial Management Perspective

Financial Management Perspective

Arbitrage opportunities between ETFs and their underlying portfolio

Document Type : Original Article

Authors
Reza Eyvazloo 1
Hamed Gh.Alamdari 2
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.
10.48308/jfmp.2023.103912
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
Exchange-Traded Funds (ETFs)
Arbitrage
Vector Autoregressive (VAR) Model
Impulse-Response
Variance Decomposision
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Financial Management Perspective
Volume 13, Issue 41
2023
Pages 117-143