November 2020

Arbitrage and Liquidity: Proof from a Panel of Exchange Traded Funds

David E. Rappoport W. and Tugkan Tuzun

Abstract:

Market liquidity is expected to facilitate arbitrage, which in turn must affect the liquidity of the property traded by arbitrageurs. We look this relationship the utilization of a special dataset of equity and bond ETFs compiled from immense trade-level knowledge. We discover that liquidity is a truly crucial determinant of the efficacy of the ETF arbitrage. For much less liquid bond ETFs, Granger-causality assessments and impulse responses indicate that this relationship is stronger and more chronic, and liquidity spillovers are noticed from portfolio constituents to ETF shares. Our outcomes verbalize the earn of synthetic securities, especially when derived from much less liquid instruments.

Keywords: Exchange traded funds, ETF, market liquidity, legislation of 1-sign, arbitrage, ETF top rate.

DOI: https://doi.org/10.17016/FEDS.2020.097

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Final Update:
November 30, 2020

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