The Research Of ETF's Pricing Mechanism And The Arbitrage Problem

Since the American Stock Exchange launched the Standard&Poor's index ADS-SPDRs on January 29, 1993, ETF products have been developing rapidly in the United States and the world. Up to the end of 2007, a total of 41 exchanges worldwide launch ETF products, asset size has reached to 796.6 billion US dollars. Along with the Shanghai and Shenzhen Stock Exchange index systems continuously improved, China's index funds with the growth of stock market continuously developded, the index of investment of the innovative products-ETF began to appear in the investors' investment portfolio. November 2004, China's first ETF-The Shanghai 50 ETF appeared, after more than two years of development, five ETFs has come out.Whether in the scales or the types, China Index Funds have made a great progress. With the index of investment funds rapidly developed in China, as a new type of fund products, the features, operation principles and mechanism of the ETF product have been caused widespread concern in the market.This article focus on the operation of ETF pricing mechanism and the arbitrage function, discussed the special nature of this product, what's the positive impact to China's securities market. Because of the unique dual trading mechanism, it has the function of arbitrage transactions, through this transaction, the ETF funds can well simulate the underlying index, and decrease the tracking error between the underlying index, thus ETF are widely recognized by the market investors and promoted the development of China's securities market.This paper starts from the definition of ETF, makes an introduction to the ETF's organizational mode of operation and characteristics, analysis the ETF arbitrage trading mechanism, and discussed the ETF's two arbitrage model; Then through researching the impact of various arbitrage income ETF Factors, such as tracking error, the discount premium rate, the cost arbitrage, that make the conclusion of the ETF risk-free arbitrage trigger conditions; Finally, make the empirical research of the Shanghai 50 ETF, the results show that, ETF funds do exist arbitrage opportunities, and make a specific analysis to the reasons of arbitrage opportunities.