Analysis Of International Exchange Traded Funds Premiums

International Exchange Traded Funds (International ETF) are equity issues of companies whose assets consist entirely of cash and shares of stock approximating an international index. The ability to purchase and redeem creation units gives international ETF an arbitrage mechanism intended to minimize the potential deviation between the market price and the net asset value of ETF shares. This should ensure that international ETF do not trade at significant premiums or discounts from the fair value of the portfolio.But in particular trading, People investigated the extent and properties of the resulting premiums and discounts of ETF from their market value. For finding the reason of international ETF's premiums, this paper measured the true daily NAVs and true daily premiums, and then made a cointegration tests between international ETF's daily closing prices and true NAVs. The statistics showed that the deviations between daily closing prices and true NAVs are only temporary.This paper concluded several factors which can affect the true premiums of international ETF, such as bid-ask spread, trading volume, exchange rate, and the index of home markets and issue, markets. Paper used a panel regression model to examine the factors above. The regression result showed that a significant variation of the premiums still remains unexplained.At last this paper made an artificial stock and international ETF model to explain the effect of time-zone errors to the true daily premiums. With the use of agent-based computational finance, artificial model showed that true daily premiums are proportional to time-zone errors. This statistical result also confirms the conclusions about time-zone errors which mentioned in previous literature.