Etf Arbitrage Opportunities Pricing

Exchange-traded fund (ETFs), also knowns as exchange-traded index funds, is in essence a special kind of open index fund. It's an innovative product of the open-end fund. And ETF has the exponential fitting, trade facilitation and low-cost advantages. ETF can be traded in the listing market, and investors can directly buy or sell ETF shares on the stock exchange as the indivial stock or closed-end funds, which is very convenient. The purchase and redemption of ETFs have its own characteristics, that is, investors can only use the baskets of stocks, corresponding to ETFs'targetting index, to purchase or redeem shares of ETFs, which is different from the open-end funds, purchased or redeemed by cash.According to the efficient market theory and the no-arbitrage pricing theory, the secondary market value of ETF must equal to the fund's net value (IOPV). However, because of the tracking ability, management cost, supply and demand factors, and market inertia and information dissemination rate, there are differences between MV and IOPV, causing arbitrage opportunities. In the review of literatures, scholars focused primarily on the tracking error of ETF to its target index and ETF's arbitrage mechanism. However, there are only few researches about the reasons why there are ETF's arbitrage opportunities rising and the value of these opportunities.This paper chooses China Shanghai 50ETF as the target to have a deep research on the high-frequency data of the spread between ETF's MV and IOPV. By statistics describing these high-frequency spreads, I use the B-S option pricing model to price the ETF's arbitrage opportunities arising from the spread. During the sample period, from Feb 4,2010 to Feb 23,2010, the empirical results show that the amount value of positive arbitrage opportunity is RMB 0.00002 for one share at a trade which has totally 100 million shares, or the total amount value for one arbitrage trading is RMB 20. The Call option value of the positive arbitrage opportunity is greater than 0, indicating the arbitrage opportunity exists because of the tracking error or the cash alternative in the purchase and redemption.In a series of assumptions, ETF's arbitrage opportunities resulted from the spread between MV and IOPV is valuable. And if the investors can correctly take advantage of the arbitrage opportunities, they can profit. However, on the other hand, the calculated value of call options from the adjusted B-S option pricing mode is very small, which is also in line with the expectations and the market situation, because the current arbitrage space of China Shanghai 50ETF has been significantly reduced. There is very small probability that investors can profit from taking advantage of the ETF's arbitrage opportunites from the sample period.