ETF arbitrage: Intraday evidence |
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| Authors: | Ben R. Marshall Nhut H. Nguyen Nuttawat Visaltanachoti |
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| Affiliation: | 1. School of Economics and Finance, Private Bag 11-222 Massey University, Palmerston North, New Zealand;2. Department of Accounting and Finance, University of Auckland, Private Bag 92019, Auckland 1142, New Zealand;3. School of Economics and Finance, Massey University, Private Bag 102-904. Auckland, New Zealand |
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| Abstract: | We use two extremely liquid S&P 500 ETFs to analyze the prevailing trading conditions when mispricing allowing arbitrage opportunities is created. While these ETFs are not perfect substitutes, our correlation and error correction results suggest investors view them as close substitutes. Spreads increase just before arbitrage opportunities, consistent with a decrease in liquidity. Order imbalance increases as markets become more one-sided and spread changes become more volatile which suggests an increase in liquidity risk. The price deviations are followed by a tendency to quickly correct back towards parity. |
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| Keywords: | G1 G14 |
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