Pricing Efficiency of China's Exchange-Traded Fund Market

Abstract

This study investigates the pricing efficiency of the Shanghai 50 ETF (SSE 50 ETF), the first exchange-traded fund (ETF) in China. The empirical results demonstrate that ETF market prices and net asset values (NAV) are cointegrated and there is unidirectional causality from price to NAV. The conditional variance dynamics from the augmented Generated AutoRegressive Conditional Heteroskedasticity (GARCH) framework show that ETF market prices influence NAV volatility and therefore can be used as price-discovery vehicles. The study also finds that the fund's prices did not closely follow the NAV during the second half of 2007, when the Chinese stock market experienced substantial volatility, reflecting sudden increased market risks as well as potential arbitrage opportunities during financial turbulences.