The thesis describes the mechanism of Exchange Traded Fund (ETF) spread arbitrage with perfect substitutes and demonstrates that spreads between ETFs in Taiwan can be constructed so as to result in risky arbitrage. The variables used Polaris Taiwan Top 50 Tracker Fund , Polaris Taiwan Electronics Tech ETF , Polaris Taiwan Finance ETF , Polaris Fubon Taiwan Eight Industries ETF and Polaris New Taiwan ETF for the trading-rule simulations.
The results are as follows: all ETFs are nonstationary I(1) processes. On the contrary, the null hypothesis of ADF unit root is rejected for the first-order differences of each series at the 1%, 5% and 10% significance level, the differences of prices series are stationary I (0). The long-term relationships among ETFs are detected by cointegration tests. The prices of related ETFs in this study are found to be cointegrated and the spread derived from the cointegration relationships are mean-reverting. The trading-rule simulations suggest that the average profit from spread arbitrage is statistically significant after transaction costs of spread arbitrage are very attractive.
