Investigation of market impacts of arbitrage trading between an ETF and its underlying assets using an agent-based simulation

Isao Yagi, Xin Guan and Takanobu Mizuta

Finance Research Letters, 2024, vol. 67, issue PB

Abstract: We investigated how arbitrage between an ETF market and the underlying markets affects the price impact on each market though an agent-based simulation. The results showed that when a large price impact occurs in a particular market, it can spill over to other markets. Further, in situations where an ETF market is less liquid than the underlying markets, the spillover can be even greater. This implies that price impacts tend to spill over from the market of an arbitrage’s limit order to the market of the arbitrage’s market order.

Keywords: Agent-based simulation; Artificial market; Arbitrage trading; ETF (exchange-traded fund); Financial market (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:67:y:2024:i:pb:s1544612324008924

DOI: 10.1016/j.frl.2024.105862

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