Title page
Contents
Abstract 2
1. Introduction 3
2. Background: ETF Arbitrage Mechanism 7
3. Data Description 10
3.1. ETF Premium 11
3.2. ETF and Portfolio Effective spread 12
4. Liquidity and the Speed of Adjustment of Mispricing 14
5. Joint Dynamics of Arbitrage and Liquidity 16
5.1. Adjustment Regressions 16
5.2. PVAR Analysis 19
6. Conclusions 25
References 26
Appendix 29
A. ETF Categories 29
B. Calculation of Basket-level Effective Spreads 29
C. Calculation of Securities' Effective Spreads 29
Table 1. Summary Statistics 31
Table 2. Mean-reversion of ETF Mispricing 32
Table 3. Pre-Filtering Regressions: Equity ETFs 33
Table 4. Pre-Filtering Regressions: Bond ETFs 34
Table 5. Correlation Coefficients of Adjusted Variables 35
Table 6. PVAR: Domestic Equity ETFs 36
Table 7. PVAR: Bond ETFs 37
Table 8. Correlation Coefficients of Innovations from PVAR 38
Table 9. Granger Causality 39
Figure 1. ETF Arbitrage without Transaction Costs 40
Figure 2. ETF Arbitrage with Transaction Costs 40
Figure 3. Distribution of Fraction of Days with Equal Baskets 41
Figure 4. Domestic Equity: Distribution of ETF Premium, and ETF and Portfolio Spreads 42
Figure 5. Domestic Bonds: Distribution of ETF Premium, and ETF and Portfolio Spreads 43
Figure 6. Equity ETFs: Impulse Response Functions 44
Figure 7. Bond ETFs: Impulse Response Functions 45
Figure 8. IRF: Comparison of Equity and Bond ETFs 46