Premiums and discounts in ETFs: An analysis of the arbitrage mechanism in domestic and international funds

We study premiums/discounts associated with ETFs using the Ornstein-Uhlenbeck process augmented with jumps. Our results confirm the high efficiency of the ETFs' arbitrage pricing mechanism. The median long-term mean premium of U.S. equity ETFs is zero. International equity ETFs and bond ETFs face more barriers to arbitrage, which results in higher long-term mean premiums and lower speeds of adjustment. Enhancing the mean-reverting process with jumps improves the model fit. The probability of jumps is the highest for international equity ETFs.