ETF Divergence From Net Asset Value

Open Access
Author:
Mancini, Michael David
Area of Honors:
Finance
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
  • David Haushalter, Thesis Supervisor
  • Brian Spangler Davis, Honors Advisor
  • Brian Spangler Davis, Faculty Reader
Keywords:
  • Finance
  • Economics
  • ETF
  • premium
  • discount
  • deviation
  • NAV
  • irrational
Abstract:
One of the fundamental financial theories is the law of one price, or the idea that an asset will sell at the same price in all markets. Closed end funds (CEFs) often times appear to violate this law by trading at a different price than their stated net asset value (NAV). Those funds, however, have barriers that prevent arbitrageurs from participating and eliminating inefficiencies. Exchange traded funds (ETFs) are structured differently than closed end funds in such a way that makes arbitrage possible. In times of financial stress, however, ETFs also can trade away from their net asset value. This paper explores the causes of ETF divergence from NAV and attempts to provide quantitative predictions as to when it occurs.