Research On Arbitrage Mechanism Of Institutional Investors On The Exchange Traded Funds And Its Effect

Exchange Traded Funds combines the characteristics of Open-end Funds and Closed-end Funds, and also have the trading mechanism, that it can be purchased and redeemed in the primary market, and also can have transactions in the secondary market. This mechanism provides an effective mean for institutional investors making profit from arbitrage. This innovation funds were widely followed with interesting investors, since the first Exchange Traded Fund——Shangzhen 50 ETF listed in Shanghai stock market. With the continuous innovation of Exchange Traded Funds and a great variety of trading styles, more and more institutional investors starting to arbitrage these funds. As a major investment party of the financial market, institutional investors have a more rational and standard investment behavior than individual investors, and usually have arrangement of the risks and benefits through arbitrage. As for the arbitrage mechanism of institutional investors on the Exchange Traded Funds and its effect, it is of very important theoretical value and practical significance.Combined theoretical analysis and empirical analysis, this thesis described the mechanism and prerequisites of institutional investors arbitraging on the Exchange Traded Funds. The paper reveals that Institutional investors can usually adopts three arbitrage strategy, arbitrage between the primary and secondary market, arbitrage between the future market and the spot market based on Share Price Index Futures, arbitrage based on securities margin trading. When institutional investors arbitrage between the two markets, they can choose the instantly arbitrage, event arbitrage and the T+0 bullish arbitrage, or they can also mix the three means to make more profit. To ensure the risk-free arbitrage, institutional investors need to meet three prerequisites: a good market liquidity, timely liquidation settlement or allow short selling in the secondary market, also a lower fee on the primary and secondary market. Moreover, the thesis discusses the main factors affecting the arbitrage effect by using an unbalanced panel data model to conduct the empirical research, and the sample data ranging from the second quarter of 2005 to the second quarter of 2014. The empirical results indicate that the scale, trading volume of Exchange Traded Funds and the market quotation had a significant impact on the yield rate of the fund, while the holding proportion of institutional investors, the tracking error and the discount or premium rate just had a very limited impact on the yield rate of Exchange Traded Funds. To find out the reason, it is due to bounded rationality of institutional investors, asymmetric information and the imperfect trading mechanism of Exchange Traded Funds. Therefore, relevant government departments should improve the margin trading mechanism, optimize the Exchange Traded Funds’ mechanism of trading, purchase and redemption, gradually perfect the securities market and enhance the market efficiency. For the institutional investors, they should diversify the investment strategies, and form the rational arbitrage behaviors.