Arbitrage Research Of Exchange Traded Funds

Exchange Traded Funds(ETF)is one kind of new financial derivation tool and one of the funds in the world which rapidly grows. By Dec.31st, 2005, whose amounts of assets have reached almost 360 billion dollar. In Asia, including Hong Kong SAR of China, Singapore, Korea and Taiwan of China, there have been developing ETF mostly in recent years. The history of ETF has only ten years a bit more since the born of world first ETF in 1993. It has been one of the most important derivatives on international financial market for its big transacting quantity and frequency.Since from the beginning of the 90's, the Shanghai stock exchange and the Shenzhen stock exchange had been established, the stock market obtained the over speed development. Stock market development history also is the history which the financial tool innovates unceasingly. In this environment full of indexing investment, the first ETF——Shangzheng50 Exchange Traded Funds was born on Nov.29th, 2004 and listed in Shanghai Stock Exchange on Feb.23th, 2005. As a new type fund, people pay a great attention to its property, working principle and arbitrage mechanism. Since then, the financial innovations begin with the putout of 50 ETF.ETF is take some specific stock price index as the normal index, sets up take a basket specific value stock combination as the foundation. It both relates with the open fund and the close fund, ETF is one kind mixed fund which takes excellence of the numerous funds and gets rid of disadvantage of the numerous funds new product. By reason of ETF can be purchased and redeemed with a basket of stocks, so it can be traded in Securities Exchange and permitted short selling. The present paper draws up in the foundation which the predecessor studies, key on the ETF characteristic, the operational mechanism, the development condition, the arbitrage principle and the influence factor, and relates the ETF arbitrage principle with our country's special details, systematically proves 50ETF on the arbitrage mechanism to conduct the demonstration research. Some conclusions and teachings will be drawn with the expectation that institutional investors will be well advised from this paper. There are four chapters of this content and a concluding remark. The first chapter is primarily a profile of the basis of ETF. The discussion focused on the dual trading mechanism of generalized ETF product.Chapter II focused on the ETF arbitrage principle, the prerequisite and the arbitrage operation flow. In which mainly analyzed the reason of the ETF arbitrage opportunity and carries on the arbitrage operation flow.Chapter III did a thorough analysis for the ETF arbitrage Affecting factors. The tracking error, the discount and premium rate, the arbitrage cost affect the crucial factor which whether the ETF arbitrage does succeed.Chapter IV is the last part of the paper. At first, it carried on the ETF arbitrage model and obtained the ETF non-arbitrage boundary. The second, it elaborated the different arbitrage strategy of the instantaneous arbitrage pattern, the reservation stock pattern and the delay transaction pattern separately. Next, it has constructed the ETF arbitrage variable cost quantification model and obtains the most superior arbitrage strategy choice through the demonstration research. Finally it carried on the brief explanation on the ETF arbitrage risk for the investors.In the final part of the concluding remarks, this paper reaffirmed the conclusions of the study on the real meaning of ETF arbitrage and draws the conclusion of the paper.Studies on this subject abroad have done a lot of work about ETF arbitrage, but in our country, because ETF was recently launched, so a comprehensive, systematic study is relatively less. This paper embarks from the theory, by the data, finally returns to the fact, the logical organization is strict. As an innovation finance product, ETF and its arbitrage research is still at a stage of development, there are many issues worthy of further study. Restricting by academic aptitude and length of articles, the paper still has many shortcomings. I really hope teachers and students will give valuable advice to me, I will continue to study relevant theory in the future.