 Authorized participants’ regulatory constraints and limits to ETF arbitrage during market turmoil Evidence from the dash-for-cash episodeClaudio E. Raddatz K. Journal of Banking & Finance, 2025, vol. 179, issue C Abstract: This paper shows that authorized participants’ (APs) regulatory constraints weakened the arbitrage relationship between bond ETFs’ primary market activity and their premia during the market turmoil triggered by the dash-for-cash episode in March 2020. Arbitrage activity weakened more severely when those APs with a history of creating or redeeming an ETF’s shares had low regulatory capital ratios, consistent with persistence in arbitrage activity. The results also reveal that the direction of prior arbitrage activity matters, and show that the decline in arbitrage intensity was especially pronounced for ETFs holding less liquid bonds, whose lead market makers had lower regulatory capital ratios, and for those associated with non-bank-affiliated APs. Finally, the paper provides a novel estimate of the elasticity of primary market activity to ETF premia, contributing to the literature on limits to arbitrage and intermediary frictions. Keywords: Limits to arbitrage; Exchange Traded Funds; Authorized participants; Market turmoil; Price dislocations; Financial stability (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:179:y:2025:i:c:s0378426625001190 DOI: 10.1016/j.jbankfin.2025.107499 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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